How Microsoft Could Never Have Obtained an ROI on their LinkedIn Acquisition

Executive Summary

• Microsoft made a major error in acquiring LinkedIn.
• The lack of coverage of this error illustrates how controlled IT media is by Microsoft.

Introduction

This topic started as a discussion around the article How LinkedIn Has Degraded as a Content Platform. In this article, we will cover how big of a mistake the acquisition of LinkedIn was. We found explanations around this error and added our analysis that is very difficult to contradict.

Our References for This Article

If you want to see our references for this article and other related Brightwork articles, see this link.

Getting False Information About the LinkedIn Acquisition

The establishment media demonstrated its high degree of subordination to Big Tech through the articles I could find on the Microsoft/LinkedIn acquisition.

Exhibit A: Wired’s Coverage: LinkedIn Was About Improving Microsoft’s Reputation?

In an article in Wired published in March of 2017, titled Now We Know Why Microsoft Purchased LinkedIn, the writer gave tongue bath to Microsoft. I won’t subject readers too much of the article, as it is too idiotic to read. Imagine whatever Microsoft’s PR department would write in a press release, and you would have it about right, but this part of the article was interesting.

To succeed, however, Nadella must do more than fix the company’s business. He must turn around Microsoft’s lethargic, boastful, go-it-alone reputation — especially in clubby Silicon Valley where deals are made over dinners, the most talented entrepreneurs have their pick of big-name investors, and talent is hard to woo. In the constant competition over engineers, designers and product managers, Microsoft must establish itself as a smart place to do great work. In other words, in Silicon Valley it’s gotta be cool.

With a phone call or an email, Hoffman can get just about anyone in tech within minutes. He knows who to call. And in a competitive industry, he has gained his reputation through trading favors. He’s the quintessential nice guy.

As a board member, Hoffman will be Microsoft’s ambassador in the Valley. Among a core group of constituents for whom Microsoft may not factor into conversation, Hoffman will work to raise its profile. The trickle-down effect has the potential to be tremendous as Microsoft competes for partners and talent.

The importance of reputation to a successful turnaround cannot be understated. As evidenced by Uber’s recent debacles, reputations are stubbornly difficult to dislodge. Even if a business has a sound foundation, how people view it will have a strong impact on whether it can succeed. And when Reid Hoffman calls an entrepreneur or an engineer on behalf of Microsoft, you can bet they will take it more positively. – Wired

And what did hiring “a nice guy: to manage LinkedIn accomplish? It led to what we see: LinkedIn stabbing its customers and degrading LinkedIn — just as Microsoft does with all of its businesses.

Has Microsoft’s reputation been improved since the LinkedIn acquisition? It is hard to see how. Most people that used to like LinkedIn before like LinkedIn a lot less now that Microsoft owns them.

Exhibit B: Bloomberg’s Coverage: LinkedIn Has Increased Revenues Because of Product Innovation?

Notice this observation from Bloomberg News.

Revenue has also been on the rise. In the fiscal year that recently ended, LinkedIn generated US$6.8 billion in revenue.  That’s a 28 percent increase from the year before.

Yes.

This is what happens when you massively increase your price for various plans and aggressively monetize your customers. However, what happened to customer satisfaction since the 2016 acquisition? That is easy to figure out without a survey — it has declined.

Bloomberg goes on.

“Things have certainly exceeded our expectations. We had a pretty aggressive plan in place and we’ve been able to outperform that plan,” LinkedIn CEO Jeff Weiner told Bloomberg News in a September television interview.

The driving force behind that outperformance is an improved product. People are spending more time on LinkedIn because they are more engaged, whether it’s because of the content on the platform, messaging features, or more relevant connections to other professionals.

What is the improved product which Jeff Weiner is referring to?

I ask because LinkedIn is technically worse than before the acquisition, and as a LinkedIn user, I can’t think of anything new since 2016. Ever since the acquisition, LinkedIn’s website technology and maintenance have gone into a steep decline. The ability to share content existed in 2016, providing feedback on shares existed in 2016. LinkedIn has many technical snafus, update problems, etc. This is why I question people using, say, Azure. I can’t trust Microsoft enough to use Azure because Microsoft is more focused on making acquisitions and marketing and sales than the technology side.

Quite the opposite of what Jeff Wiener said, LinkedIn is the same set of functionality, but worse — and with deliberate manipulation of the content feed to push the least valuable content higher (for revenues) versus interesting or informative shares.

Did the author of the article even bother to check how much LinkedIn had increased the cost of the various LinkedIn plans, or how much more LinkedIn had been extracting from companies to run more advertisements and push more sponsored shares? This has marked LinkedIn’s movement to an advertising platform, as expressed in the following quotation from a LinkedIn user.

Every time I click on Home I get about ****20-30 ads***. Furthermore, they allow you to report ads you don’t want to see, but disregard it and dump them on you anyway. Complaining several times about it is also disregarded. LI treats users as ***nothing but*** means of monetization via advertising with complete disrespect. – Fabian Pascal

And by this LinkedIn user.

I totally agree that the quality of LinkedIn has declined. The vast majority of content in my LinkedIn feed is either promotional advertising or virtue signaling with an emphasis on social content VS. business/professional content. – Carey Smith

Hmmm, the Microsoft users’ comments don’t seem to comport with the Microsoft/LinkedIn executives’ statements. I wonder why that would be? I have heard that sometimes executives for companies lie. And that furthermore, they have a fiduciary responsibility to lie to maximize shareholder wealth. Could that be happening here?

Did the writer ever think of asking LinkedIn users what they thought, or perhaps using LinkedIn to verify what the Microsoft/LinkedIn executives were saying?

The following quote is also from the Bloomberg article.

“LinkedIn is continually creating new ways for members to connect,” Microsoft CEO Satya Nadella said on Microsoft’s fiscal fourth-quarter earnings call in July.

This is not true. Just the opposite is true.

LinkedIn has made it more difficult for users to connect. It now disallows any messages to not contacts unless you purchase one of their plans, which has become more expensive since 2016.

As with the Wired article, the Bloomberg “author” of the article did little more than agree with everything that the executives from Microsoft and LinkedIn told them. This includes publishing false information that Microsoft and LinkedIn would like users to think is true.

Exhibit C: GeekWire’s Coverage: Slow Integration is Due to a Deliberate Approach?

The article LinkedIn CEO explains why Microsoft integrations have been so slow since the $26B acquisition, published in December of 2019, is a master class on how to do corporate propaganda, so pay attention.

In an interview with LinkedIn CEO Jeff Weiner, CNBC noted that only two of six major potential integrations discussed in a presentation when the $26 billion acquisition was announced in 2016 have come to fruition: A tie-in between LinkedIn’s Sales Navigator and Microsoft Dynamics sales software and integrations between LinkedIn profiles and Office apps.

Weiner said the companies haven’t abandoned plans for deeper integrations, but are instead taking their time to get things right, both in terms of new features and LinkedIn’s larger assimilation into Microsoft. Promised integrations that have yet to materialize include a news feed on LinkedIn with activity from Office apps, and LinkedIn Learning integration with Office.

Microsoft’s more deliberate approach to LinkedIn — and the $7.5 billion GitHub acquisition, too — reflects a push to erase a checkered past when it comes to major deals. Five years after buying aQuantive in 2007 to compete with Google’s online advertising business, Microsoft wrote down the acquisition as a loss, spurring CNNMoney to call the deal “Microsoft’s $6 billion whoopsie.”

Microsoft agreed to acquire Nokia’s struggling devices division for $7.2 billion in 2013 to bolster its smartphone hardware push. But that deal backfired as well, and in 2015 the company took more than $8 billion in charges to write down the acquisition. – GeekWire

This article left out the Skype acquisition, where Microsoft degraded a once sector-leading company to the point where it’s rare to hear people mention the term Skype.

Let us review the central assertion made by the GeekWire article. After three years (from 2016 to the article’s publication in 2019), Microsoft/LinkedIn had completed only two of the many promised integrations. These were promised to garner praise for how strategic and beneficial the acquisition would be from both the establishment media and Wall Street. Notice this claim (that proved to be untrue at the time of the acquisition)

“Together we can accelerate the growth of LinkedIn, as well as Microsoft Office 365 and Dynamics as we seek to empower every person and organization on the planet,” – Satya Nadella

And.

Nadella claimed he wants to create “a vibrant network that brings together a professional’s information in LinkedIn’s public network with the information in Office 365 and Dynamics” – Satya Nadella

Four and a half years later, neither Office 365 nor Dynamics (Microsoft’s ERP system) have anything to do with LinkedIn.

Is that really a thing anyway?

Is connecting the MS Office suite or ERP systems to LinkedIn a thing that happens? Perhaps I need Nadella to explain technology to me. However, when an inventory position is updated in ERP, does that do exactly in LinkedIn? Would it update your employment preferences in LinkedIn? Does it give a like to a content share? What is the overlap between social networking sites and ERP systems again?

Nadella tries valiantly to point around the synergy between Microsoft and LinkedIn, but it simply makes no sense. Nadella seems to think that just saying the names of various products together will hypnotize the viewer into agreeing that this is an excellent acquisition. Wiener makes several claims about integration that 4.5 years later have not come true. 

Bill Gates stated that Microsoft could make LinkedIn as successful as Facebook. This naturally did not happen, and it is another good example of why it makes little sense to listen to Bill Gates. He stated that the synergies made the absurd purchase price make sense. 

However, let us return to the shortcomings of following through on integration plans. What if Microsoft/LinkedIn had met all of its integration goals? Would the article author have declared this as a careless approach to the acquisition? If meeting objectives would be greeted with a superlative, failing to meet objectives is also met with a superlative, then no objective standard is being applied.

However, the author does not critique this lack of productivity but rather calls such a failure to meet promised goals as a “more deliberate approach.” It is unclear how not making progress can be translated into a deliberate approach, but any logic can be constructed with a nice compliant author.

The article continues.

In the interview with CNBC, Weiner noted that LinkedIn’s performance for the last three years is ahead of expectations, and being part of Microsoft has allowed it to take a more long-term approach, instead of worrying about quarterly results. – GeekWire

That is contradictory to LinkedIn’s actual behavior. LinkedIn has been taking a concise term approach by degrading its customer loyalty and stabbing its customers for short-term profit maximization. Again, you won’t hear anything like this from GeekWire. As with other articles in the other exhibits, the author has little writing at GeekWire of any kind. The article consists almost entirely of quotes from Microsoft/LinkedIn executives.

One might think that by reading these articles that the major IT media entities and their journalists serve as mindless extensions of Microsoft/LinkedIn’s marketing and PR department. I increasingly wonder why I go to a supposedly independent website that calls itself a journalistic entity when I can find the same information on the company’s website. This brings up a major question for IT media.

How is our coverage of topics different than the marketing drivel that is put out by the company?

Increasingly, it is unnecessary to go to media websites. Instead, we can “cut out the middleman” and get our information from corporate marketing departments and press releases.

Exhibit D: Forbes/Peter Cohen: Questioning the Value of the Acquisition?

I was able to find an article that questioned the acquisitions when it was made. The article was titled 4 Reasons Microsoft Wasted $26.2 Billion To Buy LinkedIn and was published in June of 2016, right after the acquisition. I cannot say it was “published” in Forbes because Forbes does not have any writers. Forbes rents out its digital real estate to people who pay to publish articles in Forbes. The author, Peter Cohen, is a stock analyst, so unlike most IT media journalists, he is interested in making money from an acquisition. He may have had a sell position in Microsoft (hence his willingness to pay Forbes to carry his article). However, Cohen’s article made some good points. Unfortunately, I had to fight through several advertisements on the Forbes website to read it. Still, I finally got through the content after being pummeled by ads for the US Army, Burberry, and Fidelity Investments.

With Forbes, every time you scroll, a new ad pops up to the right. The ad keeps moving and flashing new images, so I am disrupted from reading the article. And this is for the right to read an article that someone paid to have published in Forbes. Forbes apparently needs to receive a lot of money, even though they have fired nearly all journalists and editors.

I want to share a trick I figured out for reading from the Forbes website undistracted with the reader.

At least on a Mac, I was able to place a text editor window over the ad and still scroll over the left portion, where I was able to read the article without having my eyeballs attacked by floating Burberry purses. 

Some of Cohen’s Most Interesting Points

Point #1: Business Social Network is Low Margin?

If the industry of business social networking were attractive, LinkedIn — which is a leader — would likely enjoy the economies of scale needed to make it profitable. But the company lost $166 million on $2.9 billion in sales in 2015. This reveals another fundamental flaw with the industry — its profits are so slim that LinkedIn must use more stock than its peers to attract and retain talent.

We seem to be expecting areas that are low margins to become high margins automatically. This is the problem with the valuation that Microsoft placed on LinkedIn. The valuation paid has sown the seeds of LinkedIn’s decline, as they have had to stab users and devalue the platform with advertisements to make that ROI. If Microsoft were as smart as it says it is, it would have never paid that much for LinkedIn. Microsoft “bought into its own BS” with the acquisition, proposing integrations and “synergies” with Microsoft software that has yet to materialize.

Point #2: Selling Microsoft Products to LinkedIn Users?

While I have no doubt that Microsoft will try to use the 433 million people who have their profiles on LinkedIn to sell them software and services, there is no reason to believe that Microsoft has the strategic skills needed to revive LinkedIn’s growth.

This is not a bad guess. However, it isn’t easy to see how this would occur, and it has not, in fact, been a focus of the post acquisitions LinkedIn. Rather LinkedIn has ramped up selling ads, so allowing other companies to market to LinkedIn users.

Point #3: Using Weiner as a Figurehead CEO?

How will Weiner continue to be CEO of LinkedIn? Sure he can keep the title if he wants — but he will report to Nadella instead of a board of directors. So he is no longer CEO.

Weiner has value as a figurehead and to fight the impression that Microsoft would take over LinkedIn as it has a poor record with acquisitions. Weiner could nap the day away in a hammock in his office and still have a strong propaganda value to Microsoft. And Cohen is right. LinkedIn is clearly not being managed anything like it was when Weiner ran the company. Notice how Weiner is constantly saying how much Nadella has kept all of his promises during the acquisition. Yes, that is Weiner’s role now, to shine Nadella’s boots for media, so they can have some quotes to repeat.

Point #4: LinkedIn Employees Departing?

It is also unclear why employees will want to stay at LinkedIn once it is owned by Microsoft.

Yes. As LinkedIn loses its talent, and with many vested individuals now wealthy enough to go on to whatever venture tickles their fancy, LinkedIn will become more and more Microsoft in its culture.

Point #5: Erosion of Microsoft’s Financial Position?

Finally, Microsoft’s cost of capital could increase since the deal is being financed by debt and Moody’s is considering a downgrade of its AAA rating.

Yes. $26 B is a lot of money, and it worsens Microsoft’s financial position as LinkedIn cannot drive the revenues to support an ROI on such a large base. In fact, as pointed out by GeekWire (but not in the article I mentioned, Microsoft has lost money with LinkedIn every quarter because of the necessity to write down the investment costs. This is not surprising and could have been easily forecasted if Microsoft has bothered to evaluate the financial implications of acquiring at the price it offered.

Would Moody’s have thought of downgrading Microsoft’s debt rating if LinkedIn were a strong revenue and profit-driving acquisition? The answer is no. As observed by Cohen, LinkedIn lost money in 2015, and this when it was dressing itself up to gain a maximum purchase price as it was being shopped to Salesforce, Microsoft, and others.

Why Didn’t Salesforce Outbid Microsoft for LinkedIn?

Curiously, the suitor that would have been the best fit for LinkedIn would have been Salesforce, as it could have integrated LinkedIn contacts into the Salesforce CRM. Curiously, Salesforce underbid Microsoft as they had far more to gain from acquiring LinkedIn than Microsoft, a small player in the CRM space.

Point #6: Pummeling Users With Ads?

Nadella touted the idea that business people working on projects will love the way the combined company will be able to spam them with more targeted newsfeeds!

Is this the kind of magic that $26.2 billion buys?

It sounds like a good reason for me to dump my LinkedIn account.

Exactly.

Nadella’s plan from the outset was to degrade the LinkedIn user base with ads. Although again, you have to get a reasonable price on the asset for degrading the platform to pay off. Did Nadella calculate how many ads he could sell, how much those revenues would be, and how it would drive the ROI on a $26 B investment? Even if Nadella pushed LinkedIn to $1 B in profits through degrading the platform and turning off users (combined with increasing the prices for LinkedIn plans), that is still only an ROI of 3.8%.

I found another good article by Lance Ng, written in 2019 on the topic of acquisition. Ng brought up the excellent point that Microsoft has been hiding the profitability and, therefore, the success of Wall Street’s acquisition by placing LinkedIn into Microsoft’s Productivity and Business Processes, which means it is commingled with revenues from Microsoft’s enormous Office Suite.

It should not be surprising that both of the good articles I found, by Cohen and Ng, were not written by journalists in IT media. IT media has done an excellent job of entirely misleading the public about how bad the LinkedIn acquisition was. It is almost as if these journalists worked for Microsoft.

The acquisition price led to foreseeable problems of over monetization, which those that we charge with performing such analysis were not interested in bringing to light. Neither of these two writers works for media entities that must sell advertising to the industry.

This shows why reading, or at least taking seriously IT media, is virtually entirely sold out to industry sources for their income. There are poor analysts and bad writers, but so much of these articles appear to be so subordinate to the companies that they are reporting on that it may as well be collusion.

Conclusion

The acquisition of LinkedIn was destined never to work out financially or operationally. Microsoft has zero understanding of either media or how to create and maintain social media. Microsoft’s culture has increasingly infused LinkedIn, which has driven down the LinkedIn experience. While it is unclear what might compete with LinkedIn, there is little doubt that LinkedIn’s relevance in the market is in decline.

The financial liability of paying $26 B for LinkedIn means that not only does Microsoft have to over monetize LinkedIn users, but the acquisition was guaranteed never to be able to obtain an ROI, and this was obvious from as soon as the acquisition price was determined. This fact undermines the presumed intelligence of Microsoft’s management.

Update as of October 2021

I received this question, as well as information about LinkedIn’s financial performance.

I just got done reading an article you wrote back in 2020 about Microsoft not being able to repay back the premium it paid for Linkedin. Im curious if you have changed your mind?

This is an article that is fairly recent on their earnings:

“Revenue generated by LinkedIn rose 42% to $3.14 billion for the quarter. Microsoft said the result was driven by growth of 61% in LinkedIn’s Marketing Solutions business, which companies use to generate sales leads, website traffic and sales.”

That means that Linkedin accounted for almost 7% of ALL revenue generated for Microsoft last quarter.

I have not looked into it since I wrote that article. However, the problem is that I have stopped using LinkedIn. And most of the people I know have drastically reduced their usage. I have started calling it LinkedIn Messenger, as that is the only thing I use for now. LinkedIn has killed most people’s interest in their content feed, as it is filled with either Facebook style virtue signaling or advertisements from mega-corporations. I cover this decline in this article.

Harvesting Locked in Customers

I have yet to run the math, but if they are doing well financially, I think I know why — which is that they have entirely overcommercialized the platform to pay off the exaggerated purchase price. I also find it very likely that they can also pay off the purchase by using LinkedIn for espionage, as I covered in this article. This is the pattern of acquisitions, reducing the product’s quality and then harvesting money off of the locked-in base. I think that all the subscriptions to LinkedIn have also increased in cost also.