I thought I was done writing about Microsoft for the year. But yesterday, Microsoft CEO surprised everyone by announcing he’s to acquire LinkedIn, the work-focused social network, for $26.2bn.
Last week I wrote about the company in a pitying, cautionary tale sort of way. After a long run as top dog, Microsoft wasted tens of billions trying to keep up with younger, nimbler tech companies. R&D and M&A spending didn’t really work. Microsoft got eclipsed by Apple, Google, Amazon, and arguably Facebook.
Well, the good news is that under its new CEO Satya Nadella, Microsoft seems to be going in the right direction. The bad news is that this LinkedIn acquisition is big and risky, the sort of move that usually blows up in the acquiring company’s face, wrecking shareholder value.
Today I want to talk about the reason M&A almost always fails. And how M&A can sometimes, possibly, succeed.
work work work work work
At the turn of the millennium Microsoft was in a dominant position. It owned the operating system and the browser, ie the gateways to the internet.
Then, a couple of things happened. Native internet companies like Google figured out a way to make lots of money online, which Microsoft never did. And Apple introduced a new generation of mobile computers.
Under Steve Ballmer, Microsoft refused to accept reality. It saw itself as the rightful owner of the operating system industry. So it took on Google and Apple head on. It spent lots of money trying to make a better search engine and a better iPhone. But neither really caught on.
The problem was partially a culture thing. Microsoft had always had two big money-spinners: the Windows operating system and the Office productivity software. And the Windows division of Microsoft had a lot of political clout within the business. It refused to give up operating systems without a fight. Hence the billions spent on the acquisition of Nokia, the Windows phone, Bing, and so on.
So in 2014 Ballmer quits and is replaced by a new CEO, Satya Nadella. Nadella looks at Microsoft’s strengths and weaknesses and decides to refocus the business around “work”. Microsoft Office is still a very lucrative franchise. And Microsoft has deep relationships with enterprise customers. It sells Office, server software, customer relationship management software, and a cloud server system called Azure.
Instead of spending billions of dollars and years trying to compete with the iPhone head on, Microsoft now releases its top-class productivity software on Apple, Google and Windows devices simultaneously. Within Microsoft, the Windows crew have obviously been shoved into the corner.
So that’s what’s been happening with Microsoft since 2014. Today, Microsoft announced it was buying LinkedIn for $26.2bn.
IT not just for IT guys
The LinkedIn deal fits with Microsoft’s new strategy. It wants to own “work”. It wants to be the software company you turn to to get things done.
Or, to be more accurate, Microsoft wants to continue to own work. Right now, Windows machines installed with Microsoft office sit on 90%+ of office desks. But that’s under threat.
In the old days, Microsoft’s sales guys could get on the phone to a company’s chief technology officer and do the deal to install Microsoft software for thousands of employees. But now, web-based services make it easier for employees to push for what they want. Companies like Slack, Google and other upstarts are starting to pry away customers with slick web-based productivity software (here at Agora Financial Towers we’ve dumped Microsoft Outlook in favour of a web-based system called Asana).
I’m guessing the LinkedIn deal is related to this trend. Instead of depending on sending a salesman to meet with a CTO, Microsoft is meeting workers where they are. It’s coming up with software that workers love as much as the IT department. The LinkedIn deal points to a world where workers can keep their emails, contacts and calendars after they’ve left the company. Where one’s professional life lives on a social network you control, rather than on an employer’s IT systems. I can see how this could work out for Microsoft.
… But that’s just speculation. Let’s zoom out a bit. Let’s talk about how this could go horribly, embarrassingly wrong to the tune of $26bn.
Give and take
In a very general sense, mergers and acquisitions are a mug’s game. Somewhere between 70-90% of them fail.
Some recent stinkers include HP’s acquisition of Autonomy ($8.8bn written down of the $11.1bn paid for it); Google’s acquisition of Motorola (bought for $12.5bn, sold for $2.9bn); and Microsoft’s acquisition of Nokia. Last year, it wrote off 97% of the $7.9bn it spend buying Nokia just one year before.
Big, stupid M&A deals tend to move in cycles. When money is cheap and the market is confident, CEOs tend to spend more of their shareholders’ money on big exciting risky deals. And, as I just said, between 70 and 90% of them destroy value.
In the recent book Give and Take, Adam Grant has an idea of which deals are likely to fail. He says that when contemplating an acquisition, companies are more focused on what they’re going to get from the deal than what they can give it. They think of the value they can extract from buying a product, or buying into a coveted new market. They don’t think about whether their buying the target will actually make the target stronger.
How does the Microsoft / LinkedIn deal fit into the Give and Take schema? Hard to know. It’s an aggressive bet by Microsoft. But, unlike in the recent past, it’s an aggressive bet on a smart strategy.