Microsoft - LinkedIn Deal Lacks Synergy

Research shows that the vast majority of mergers and acquisitions (M&A) create value for the acquired company, and not so much for the acquiring company. The very rationale for an acquisition is usually that elusive beast called synergy that often fails to materialise. The company being pursued usually finds its shares going up, as other investors, sensing the buyout, try to make a quick buck.

M&A data about Cisco, which has made a habit of growth through acquisition, shows that after a number of buyouts, instead of becoming pretty good at it, their takeovers seem to follow a bell-curve — some duds, some stars, with the majority being fairly mediocre.

Why merge and acquire?

M&A is tricky unless there is some obvious rationale, for instance keeping a fabulous technology away from your competitor, or adding a valuable set of customers to your own. For example, Facebook bought WhatsApp, and that turned out to be a coup based on customer stickiness. Google bought Motorola mostly to use its trove of patents to fend off competition. HP bought Autonomy for unclear reasons, and that turned out to be a catastrophe.

In the case of Microsoft’s purchase of LinkedIn, I am unable to find any great synergy.

The key to Microsoft’s success has been its discovery of, and full exploitation of a superb business model, that of the operating system being the gatekeeper and distribution channel to all personal computer (PC) users.

It was not known a priori that control of that software could enable them to reap monopoly profits, but Microsoft figured it out and made unwilling captives out of us all—both businesses and consumers. (Indeed, I take it a little personally because we Valley Unix guys missed this completely, and lost.)

The forever elusive prize — mobile computing

Once Microsoft realised that the days of the PC were numbered, they moved  successfully into complementary businesses such as the cloud. But the new prize — mobile computing — has eluded them. That was partly because their technology was backward.

The monolithic Windows is a bunch of band aids on top of a conceptual model that is of a single-user, un-networked local system (as was the original DOS, nee QDOS, or Quick and Dirty Operating System).

The distributed nature of Unix and its derivatives Linux, Apple iOS and Android turned out to be much more amenable to adaption into the mobile space than shoehorning Windows into a smaller computing platform. Besides, all the equipment manufacturers in the mobile space were wary of Windows and Intel, having seen how they captured all the value in PCs.

The manufacturers chose to avoid them and go for the less dominant ARM instead. Besides, Google was clever enough to give Android away for nothing.

Three strikes

Partly as a result, Microsoft failed to make inroads into mobile computing, and their acquisition of Nokia’s failing phone business for $7.9 billion turned into a disaster. At least $7.2 billion was written off in Microsoft’s foray into one adjacent (mobile) market.

Next, they made an attempt to expand into the consumer space with Skype. This was a qualified success. But the rise of WhatsApp and Google Hangouts has essentially brought Skype’s march to a grinding halt, and the conversion of a Microsoft product, Lync, into ‘Skype for Business’ has not been especially appealing. That was a failed sally into a second adjacent market.

With LinkedIn, now they have made a foray into a third adjacent market – that of business customers. I am sure the calculation is that LinkedIn’s millions of users can be seamlessly linked into Microsoft Outlook and other products to form an integrated whole, so that they can spend their entire professional lives in a Microsoft ‘walled garden’. That’s interesting in theory, and there’s merit to a fully-integrated stack (like Apple’s), and to getting them hooked early (like Microsoft Office), but I am sceptical.

Why? The hottest thing in business communication is Slack, which is sort of like – I am told – WhatsApp for teams, and not email. The in thing for integrated teamwork is no longer Outlook and Microsoft Project, but Trello and similar offerings that offer simpler project management functions.

Is this the last straw?

Successful business models do break eventually. Apple made billions with its App Store (its predecessor iTunes was the first breach in Microsoft’s impregnable control of the distribution channel), but it has now saturated. Note how Apple, which has always taken a 30 percent channel fee, has halved that to 15 percent. Translation: the App Store model is no longer attractive to software developers.

Microsoft at 40+ is virtually a dinosaur in internet time. Its cash-spewing franchises, Windows and Office, are now being given away free, and the company is searching for relevance in a world where the key differentiator is how much user data you own. Google, Facebook, Amazon and Apple are well ahead, which is why, in case you were wondering, they are giving Windows 10 away, but will track everything you do.

Microsoft’s dilemma reminds me of what I saw at AT&T in the 1980s and later. All of a sudden, with the anti-trust divestiture of local telephone companies, they lost that crucial ‘last mile’ connectivity to the end customer. It lost access to the user, and spent the next 20 years, and roughly $120 billion trying to recreate that connection. All for nought, as it ended up being bought by one of its own offspring, SBC, which took on the AT&T name.

AT&T bought McCaw Cellular, and later TCI, a cable company, to re-create the last mile. It also bought (and later sold) NCR, a cash-register company, to pursue supposed convergence between computing and telecommunications. In sum, AT&T was flailing, and throwing its money around randomly. None of the supposed synergies materialised, and AT&T went under.

I’m afraid that Microsoft is looking a lot like AT&T, clutching at straws while drowning. Nokia, Skype, now LinkedIn. None of them makes much sense. Instead, it may do better to focus on its cloud business, Azure, which is doing rather well.