Microsoft (MSFT) today agreed to buy professional social network LinkedIn (LNKD) for $26.2 billion, one of the largest tech deals ever, as the world's largest software company tries to lessen its dependence on the shrinking market for personal computers.
The software giant will pay $196 per share in the all-cash deal, which is expected to close this year.
The deal also marks the first significant move for Microsoft under CEO Satya Nadella, who took over the Redmond, Washington, company from Steve Ballmer in 2014. Wall Street blamed Ballmer for failing to position Microsoft for the changing tech world, including the growth of cloud computing where companies host software applications on outside networks.
"He has really changed the narrative of the company," said James Wang, an analyst with Ark Investment Management who follows the tech sector, in an interview referring to Nadella. Wang added that Nadella has "turned around" Ballmer's Microsoft first world view. "For a company of Microsoft's size, we rarely see culture change with that kind of velocity."
Founded in 2002, LinkedIn enables users to network with colleagues and search for jobs. Wall Street had punished shares of LinkedIn after the company posted disappointing results in February, which raised concerns on Wall Street about whether the company's best days were behind it. Conversely, Nadella told CNBC that the talks between the two companies started at that time.
'To me, this is about the next phase of growth for Microsoft," he said.
Microsoft, though, has plenty of challenges of its own. The software giant disappointed Wall Street in its latest earnings report because the company's cloud business didn't grow as fast as Wall Street analysts had expected. Amazon.com (AMZN) is the leader in the cloud services market, which market researcher Gartner expects to grow 16 percent to $204 billion this year. Analysts expect the e-commerce giant to generate $16 billion in revenue this year from Amazon Web Services. IBM (IBM), among others, is eager to expand its cloud business.
"Microsoft is realizing basically that there is going to be a war for the cloud," said Wang whose employer owns shares of LinkedIn among its $263 million in assets under management. "Right now, Amazon is winning."
The deal has other perks for the companies in areas such as advertising. Microsoft, which owns the MSN portal, is expected to earn $2.63 billion in ad revenue this year, while LinkedIn is forecast to get $1.06 billion, according to eMarketer. Most of LinkedIn's revenue comes from its talent solutions business, which corporate recruiters use to target job candidates. LinkedIn expanded into the online training business last year through its $1.5 billion acquisition of Lynda.com. Microsoft is one of three companies that has an installed base of more than 1 billion users globally, while the social network has about 100 million active users.
"From Microsoft's perspective, they are transitioning from an old-school software company into a cloud and AI-(artificial intelligence) first company," Wang said. "They need all the weapons in their chest to be able to do that."
Microsoft and LinkedIn expect to reap about $150 million in cost savings from the merger by 2018 and anticipate that it will add to earnings starting in the 2019 fiscal year. The software giant's track record is mixed when it comes to integrating acquisitions. It wrote down the value of its $7 billion purchase of Nokia's core cellphone in 2013. The company's $8.5 billion acquisition of Skype and the $2.5 billion deal for Mojang, the creator of the popular Minecraft computer games, have fared better.
LinkedIn, which has posted four straight quarterly losses, saw its shares gain more than 47 percent to $192.85, the best performance since the company went public. The deal values LinkedIn's stock at a 50 percent premium over Friday's closing price. Conversely, shares of Microsoft posted a decline more than 2 percent to $50.25, which is typical for companies making major acquisitions.
Shares of other tech companies seen as acquisition targets such as Twitter (TWTR) rose on the news of the Microsoft-LinkedIn deal.