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Technology Stocks : Microsoft Corp. - Moderated (MSFT) -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (18882)	7/10/2016 11:27:43 AM
From: Glenn Petersen	Respond to of 19789

By James Surowiecki: <snip> LinkedIn’s Smart Career Move The real question about Microsoft’s acquisition of LinkedIn is how Microsoft can justify spending almost twenty-nine billion dollars on it (including twenty-six billion dollars in cash to buy the company’s stock, and another $2.6 billion in acquired liabilities). The obvious, and inevitable, answer that Microsoft offers is “synergy”: LinkedIn will be far more valuable as a part of Microsoft than it is on its own, and will also make Microsoft’s operations more valuable, too. Synergy is often a myth—being under the same roof doesn’t necessarily make it easier for companies to integrate their products and services, and partnering with a company is often more economically sensible than acquiring it. But, even if you accept, for the sake of argument, that there will, in fact, be real synergies, it’s hard to see how they could be big enough to make the numbers add up for Microsoft. LinkedIn’s current operating cash flow is a little more than six hundred million dollars a year. Now, obviously, Microsoft did not buy LinkedIn for its current profits. It bought it for the enormous profits it believes it can make in the future. The problem is that, even if you assume that LinkedIn’s profits will grow at a very fast clip now that it’s part of Microsoft, it’s going to be hard for it to create twenty-nine billion dollars in net present value for Microsoft. In fact, as Shawn Tully, of Fortune, shows, for LinkedIn just to earn the same return on assets that Microsoft currently does (which is around fifteen per cent), it would have to roughly quintuple its profits. The fundamental economic issue here is that the stock prices of technology companies, with few exceptions, already reflect the market’s often-outsized expectations of fast earnings growth in the future. When you buy a share of Amazon or Facebook, you’re not paying for the company’s current earnings. You’re paying for its earnings over the next twenty-five or thirty or even fifty years, because that’s how far out the market is, in effect, looking. LinkedIn’s market capitalization, similarly, was built on the assumption that the company would do quite well for many years to come. By paying a fifty per cent premium to that price, Microsoft has set a bar for itself that will be very hard to get over. The truth is, though, that it probably won’t matter in the long run. Microsoft simply has more money than it knows what to do with. It’s looking for new sources of growth, new ways to spark innovation. It wanted LinkedIn, and it paid that premium because LinkedIn’s stock price had fallen more than forty per cent this year, and the company’s leadership didn’t want to sell at what it saw as a depressed price. When you’re a company as cash-rich as Microsoft is, it’s all too easy to disregard things like return on investment—what, after all, is a few billion dollars between friends? That’s why the real winners here are LinkedIn’s shareholders, who include a fair number of the company’s employees. They can now cash out their stakes and let Microsoft worry about how to make the deal work. <snip> newyorker.com