Every company has a story. Learn the playbooks that built the world’s greatest companies — and how you can apply them as a founder, operator, or investor.
Thu, 16 Jun 2016 21:11
Ben and David cover the 3-day-old acquisition of LinkedIn by Microsoft for $26.2 billion. They cover LinkedIn’s founding story by Reid Hoffman, break down their core businesses, analyze recent stock behavior, and speculate on the future of the company inside Microsoft. The big question - were they worth the price tag?
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The Carve Out:
You are not yet schooled in the power of network effects young Gilbert We'll cut that Oh, is it you is it you is it you who got the truth now? Is it you is it you is it you sitting down? Say it straight another story on the way The truth welcome to episode 14 of acquired the podcast where we talk about technology acquisitions that actually went well I'm Ben Gilbert. I'm David Rosenthal and we are your hosts We have a very special episode for you today. I can't really think of a time when I didn't call it a very special episode every episode It's special then it's true This episode is not necessarily about a technology acquisition that actually went well We have no idea how it went It is huge and it is recent today. We are talking about linkedin being acquired by Microsoft two days ago at the time of the time of recording and And super speculative, but I think the whole internet is sort of a buzz with you know What's the deal with this this acquisition? Why did they do it? You know what's the future hold and I think it's going to be super interesting to speculate a little bit and throughout some possible paths and and draw some conclusions. Yeah, we're gonna have some fun with this We I don't think we've ever gotten as many requests on slack. No email and other channels for no Please talk about linkedin. So here we are and in fact, I think This may change the timbre of what this show is about I think for the you know at some point here We might rename this to just a show about tech acquisitions because we're doing things it didn't go well things it didn't go well Really interesting anything has got a good story So we love stories here. We do our Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders Podcast we have seen dozens of tweets that say something like my favorite podcast is acquired and founders So we knew there's a natural fit. We know the host of founders well David Senra. Hi David. Hey, Ben. Hey, David Thank you for joining us. Thank you for having me I like how they group us together and then they say it's like the best curriculum for founders and executives It really is we use your show for research a lot I listen to your episode of the story of akyo marita before we did our Sony episodes this incredible primer You know he's actually a good example of why people listen to founders into acquired because all of history's greatest entrepreneurs and Vesers they had deep historical knowledge about the work that came before them So like the founder of Sony who did he influence Steve Jobs talked about him over and over again if you do the research of him But I think this is one of the reasons why people love both of our shows and there's such good Complementes on acquired we focus on company histories You tell the histories of the individual people you're the people version of acquired and where the company version of founders Listeners the other fun thing to note is David will hit a topic from a bunch of different angles So I just listened to an episode on Edwin land from a biography that David did David it was the third fourth time you've done Polaroid I've read five biographies of Edwin land and I think I've made eight episodes of them because in my opinion the greatest Such a printer to ever do it my favorite entrepreneur personally is Steve Jobs and if you go back and listen to like a 20 year old Steve Jobs He's talking about Edwin lands my hero So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is The people may die, but the ideas never do and so Edwin land had passed away way before The apex of Apple, but Steve was still able to use those ideas and now he's gone and we can use those ideas And so I think what acquires doing what a founder trying to do as well is find the best ideas in history and push them down to generations Make sure they're not lost history. I love that Well listeners go check out the founders podcast after this episode you can search for it in any podcast player Lots of companies that David covers that we have yet to dive into here on acquired so for more indulgence on companies and founders go check it out I'm a little bit of administrative before we dive in as usual I'm gonna ask please review us on iTunes It makes a huge difference and it what it's what makes the show grow and tick I'm shared on Twitter Facebook or even LinkedIn As a please share it on Microsoft LinkedIn whenever you can For those of you who we're at we get some questions, you know, I don't have I'm not listening on iTunes or I don't have an Apple device We're gonna post this on product on so search for it on product on we would love loving up both there Just please thank you as always and and feel free to join the Slack group It's really it's really awesome interacting with all you guys. We've got over a hundred people now and yeah great discussion going on So if you want to if you want to spend more time with Ben and David join the Slack group. Yeah We want to do a little bit of follow up There's been some news from our last couple episodes that we think are worth talking about for a minute here David talk about snapchat. Yeah, we're gonna we're gonna add a Sometimes we'll have this sometimes we won't but a adding a section to the show on follow-ups on previous shows So we'll do this quickly but first from snapchat a big announcement This week as well Ben Thompson are our favorite our favorite Oracle here on acquired tweeted that The the LinkedIn acquisition and WWDC or the second and third most important announcements of the week and That snapchat launching their advertising API was the most important announcement of the week. Well time will tell on that Yeah, I think all we have right now is a press release to go off of and it'll be super interesting to see how advertisers and brands adopt that Yeah big big profile in ad week though I'm talking about the launch of this API and And profiling the company worth reading willing to it in the show notes And then the second follow up we wanted to do is actually on instant articles as well Ben had a fun experience this week Yeah, I don't I don't know actually not sure if this is an announced product or or Even maybe just like a relabel in of an existing one But I I tapped on what looked like a Facebook instant oracle this week and it expanded into a native ad unit and And it was something that was a super sleek experience to just it had my email auto filled my phone number auto filled And it was a way for me to kind of join a waiting list for an upcoming product and I think Facebook has always had this direct response capture type type ad unit But it's really interesting to see them potentially expanding that That instant articles or instant ads of brella to include these other things and having a real sleek experience with it Yeah, and it cool with both of these that You know the Add products and ad product teams don't get a lot of airtime in tech with companies, but especially you know social networks and tech companies but Really cool product innovations on on both of these fronts. Yeah, yeah cool. All right with that I want to dive in let's dive in acquisition history and facts. So LinkedIn I assume almost everybody listening to this episode is a member of LinkedIn, but let's go back to when it was started If not, I'd like to invite you to join my professional and Spam your address books. We'll get to that. Okay, so LinkedIn I think I could be wrong on this, but I think was the very first Spin out not spin out, but progeny of the PayPal mafia Mm-hmm 2002 so PayPal was acquired as we talked about several times ago was acquired by eBay in July of 2002 and In December December 14th of 2002 to be exact less than six months later several former PayPalers led by Reed Hoffman Banned together and they form a new company and they call it LinkedIn and They so they start in December and then they work really quickly and they launched an launch an MVP very quickly especially again, this is like pre AWS time They launched an MVP in May of 2003 and it is a Social network and social networks are hot then the yeah, I think I remember reading the Facebook effect by David Kirkpatrick and in that book He kind of talks about that there was a group of people that were in Silicon Valley that were super involved in a lot of tech products and Realize that social networking was gonna be the next big thing and that you know, this was totally under it It explains their fast time to market because I think that You know with with friends or right around that. That's what I was gonna say there's a group of xpay powers and other kind of close people that were like You know technologies finally in the right place right now where this is about to be huge and let's let's get to it Yeah, and it's it's really cool that like there was this in in Silicon Valley this kind of like swelling of interest and and building of of social networks and you know Facebook hadn't even been started yet But Friendster was a super hot company They they just they had raised money from benchmark and Somebody else I can't remember but we're darling of Silicon Valley My space was growing quickly and read Hoffman and Mark Pinkis both put money into Friendster if I recall I think that's right I think that's right. Yeah Anyway, so they start they launch in May of 2003 and they have a really interesting Interesting sort of bootstrapping mechanic for the network to get you know How do you start a network from a cold start and that was the infamous and Product of a lawsuit later on as as is a recurring theme on our show the infamous scrape your address book and spam all of your All of your everybody in your email address book Yeah, and in a very funny kind of super foreshadowing or foreshadow-esque way Kind of reminds me of Microsoft. I mean they did this thing that was um, you know sort of sneaky and Maybe would earn them a lawsuit and they sort of just did it knowing that the Upside from doing this thing You know, it would it would it would be huge and it would be something where they would have to pay the price later They got sued. I think it was a hundred million dollars suit later on for for this But um, you know once they had the network right then you have that word, you know And it's this is like a total recurring theme in network driven technology companies like you know Doesn't get talked a little bit about these days, but it's on the internet like Airbnb totally did this You know off of Craigslist to bootstrap their supply networks to start and many many other Networks have done the same thing and do you know about Microsoft's like price per core thing We were talked about this on the show. I don't like that price per CPU They basically put it when they were originally selling windows or maybe it was DOS Really early on they were They had it in their sales contracts that they would make money for one copy of windows per core shipped by someone who Entered an agreement with Microsoft to sell windows at all So they basically squash the competition because Manufacturers realized oh well, I'm paying for a copy of windows whether I put it on here or not Yeah, so I may as well ship windows and by the time you know They got sued for that and and they I think actually the justice department forced them to pull that out of their their contracts Um by the time that came around They you know had already used squash the competition and we're totally way out ahead It's totally you know when you're facing a cold-star problem as a network, you know the chicken and egg problem like You can't you know you got to have something to a some unfair advantage to get through it You know doesn't always have to be illegal, but in many cases it turns out it was So late by late 2003 the network is starting to take off a little bit. It's still really early The raise a series A from Sequoia $4.7 million dollars, which was a lot of money that day especially after the internet bubble had burst um And uh Mark Kwame joins the board later when he left uh Sequoia Mike Moritz takes over and is still to this day I believe on the board of LinkedIn and Mark Kwame uh is now in in Columbus, Ohio run drive capital Exactly Ben's hometown Columbus shout out shout out um And uh and so things continue to go well and in 2004 the next year they raised their series B from Greylock and super cool about two I think about two years ago much like uh in when we talked about with YouTube and through the lawsuit um of YouTube we were able to see Sequoia's investment memo about that uh two years ago Reid Hoffman open sourced quote-unquote uh his pitch deck for for his series B a Greylock and it's this great document We'll link we'll link to it in the show notes, but he has the whole slightly edited uh pitch deck that he used for LinkedIn series B um and then he has commentary on it and and he's like very self-critical you know This was you know obviously this worked but like we made a bunch of mistakes and like I was really nervous about these things and trying to cover up like we had no revenue Everybody was like the elephant in the room was like why the heck do you guys not have revenue And like I was like really nervous about that um uh cool document so um in the pitch deck you know he he kind of the LinkedIn positions uh they position it as like the the unbiased sort of you know ground source of truth about professionals um and talk about how with all the existing ways of finding professionals in the world at that time like was mostly kind of directory-based and all these incentive problems and people were incentivized to make themselves look good or to um you know be founded to do sales leads and there was nothing you know and they thought that a network could solve all of these incentive problems and create true you know for the first time true uh information publicly available on the internet about professionals and where they are and how to find them and turns out they were right um as we talk about this acquisition you know LinkedIn has never been primarily an advertising based uh network they they've advertising based business they've had ads as part of their business line but most of their revenue comes from monetizing recruiters um and so as people have been commenting about this acquisition you hear lots of talk about like oh LinkedIn doesn't have a lot of engaged users and I spend no time on the site and it looks like crap um but you can't really judge this company in the same way that you judge Facebook or Twitter because it's not how they monetize no and Josh element has a great post that I'll put in the show notes to Josh is a uh he was at LinkedIn um he's he's been in a bunch of great companies and he's at graylock now and he has a great post talking about you know you can't look at this like you know are is you know are the users of LinkedIn really like ex multiple more valuable they're not that engaged I mean at the end of the day they are able to monetize those users in a very different way because they sell an extremely uh high value product which is yeah browse and access to these people yep and um and it's interesting later what we'll get in a minute to uh LinkedIn's IPO but actually in the IPO prospectus the list in the risk factors uh quote a substantial majority of members do not visit the website on a monthly basis which is funny when you compare them to you know many of the other businesses that we've looked at on this show um but again it's not they don't make money when you visit the website they make money from having your data up-to-date professional data about you on the system and and you being found so so they build these business these business lines over time but they're they're three that LinkedIn has um and the first is what they call talent solutions and that's about 60% of their revenue um and that is for recruiters um and it's super as Ben was talking about I mean this is a super expensive product that they sell to recruiters the full product is $900 a month yeah uh per seat and I think that the cheapest way to go to LinkedIn premium is like 600 bucks a year it's a it's a hundred dollars a month yeah about 1200 a year yeah so think about that every time somebody contacts you and has the little yellow in thing there but as like you know they've completely they've just knocked it out of the park and executing on this like if you are a recruiter operating in the HR world today you need to have you know LinkedIn recruiter like it's just there's it's like a joke if you don't right right and and uh you know you like let's imagine that you're a company and you haven't purchased this for your recruiting department you're not going to be able to hire any recruiters because they're you know they're going to be hamstrung from day one yeah so they've created this just incredible expectation in the market that that is a tables table stakes tool to have table stakes and they've captured a ton of value in that market um so then the other two business lines they have they have other the second one they call marketing solutions and that is primarily ads that they show in various forms uh on the site um whether it's sponsored in mail or or all sorts of things and then the third one is premium subscription so this is um what they've spent a lot of time on over the last few years um and that's monetizing um monetizing members of LinkedIn who are not recruiters oh so okay you're separating so LinkedIn premium is separate from their recruiting tools yes and LinkedIn premium uh they're different flavors of it um but gives you access to broaden out beyond your second degree network um on LinkedIn and that's great like is I mean I use it all the time I mean is uh is basically this tool was meant for venture capitalists I think and business development folks and sales folks um and and that's about 20% of their revenue too so um and and that's about three billion a year in revenue I think uh total yeah yeah I think that actually did not look that up um shut up yeah I think that's about right um and and that's a about a hundred and six million users hundred and six million active users uh just about four hundred million registered users on the site oh interesting uh which is very interesting so um so they continue they execute super well uh on on this as as a private company um and and the sort of biggest event that they have before they go public is in two thousand um I believe it was two thousand seven yep uh read actually steps aside as CEO and they bring in an outside CEO to be uh to run the company read stays at the company day to day I got named Dan Nye um so this isn't actually talked about uh Mati he didn't stay very long he was there less than two years came from into it and then he was at advent software um he went on to become CEO of rocket lawyer um and uh which reminds me a total I found this doing research for the show on a side but really kind of hilarious um when they raised their series C uh which they did in uh in January of 2007 right before this happens um they they raised Bessimer led it but they also had this other firm they hadn't heard of uh in there called the European Founders Fund and I was like what's the European Founders Fund and I looked it up and it's the Samvar brothers wait we've talked about them before right the these are the the guys that run rocket internet rocket lawyer made me think of it um in uh in Europe that you know copycat all the US businesses and it was like this is just too funny the Samvar brothers had a venture capital firm I don't know if it still exists called European Founders Fund so there's just copying Founders Fund just like they do with many other businesses so man it works for them um so I just saw that and I was like that is too funny um so uh Dan doesn't last very long as CEO but in December of 2008 uh they uh bring in Jeff Wiener and he is still today the CEO of uh of LinkedIn um and uh and so and even will be inside Microsoft exactly yeah and they will remain so within Microsoft um in January of 2011 uh the company finally filed files for an IPO they go public in May of 2011 um they price uh they price the IPO at 45 dollars a share it trades up to 94 dollars and 25 cents by the end of the first day of trading um and this was like I remember this was like a watershed moment at the time they were the first like sort of new wave you know internet company big internet company to go public um after the sort of mid-2000s um and it was shortly thereafter that Facebook went public um that uh Pandora went public the Twitter went public um so this was this was a big moment and that everybody kind of realized that these social networks that you know we're still you know people were like how does Facebook make money you don't even know Facebook makes money in a very different fashion from LinkedIn but when they when LinkedIn you know filed their perspectives for the IPO people like man this business is going to do like 50 million in EBITDA this year um so it was it was a big moment um and uh and so and then the stock uh continued to do really well for over the five issues that it was public uh up into going up into the you know two hundreds and and above until what February this year until until February 5th 2016 just a few months ago was uh on a Friday uh both LinkedIn and Tableau announced uh fourth quarter 2015 uh results and uh and expectations for the year to to Wall Street and it was like it was like Black Friday for software companies yeah and it actually it it killed the um the private company valuation and some of the market cap of of other SaaS companies and it it felt like it was super sensationalized and not well understood by the market because what LinkedIn so LinkedIn announced earnings they actually beat expectations on earnings for the fourth quarter of 2015 but they announced lower than wall then guidance that was lower than Wall Street expected for 2016 and the stock got hammered was down 43.6% in a single day 10 billion dollars of market cap just wiped out of LinkedIn yeah I mean they basically were signaling that we're hitting the top of our S curve and that you you can't count on this continued growth in the future which had been priced into their stock yeah yeah and so I think you know while that core business was still strong they they were looking for secondary revenue channels with they they had a display ads business that they had shut down a little bit earlier at least moved resources away from and then there was a second product um through or what that was called that that was it was a lead sales navigator well sales navigator they still have okay but the growth that would they they expected huge growth in sales navigator and it's been slower to materialize we'll get into this um but um but you know at one point LinkedIn had had a had a market cap of over 50 billion dollars um and uh and between that and then and then following um was just uh you know fell off a cliff in terms of the stock price um on that same day similar thing happened to tablo which is a great software company here in Seattle um and because of those two um those two uh the those two companies and you know announcing weaker than expected earnings the whole SaaS sector public SaaS companies just took a big hit so like on that on the same day on Friday New Relic down 23% Zendesk down 20% HubSpot down 20% Workday down 16% NetSuite 15 click 14 demandware which ends up getting acquired by Salesforce last week two weeks ago um it's down 13% Salesforce itself was down 13% it was just carnage yeah also nice research thank you internet um and uh and and so then uh for the last couple months the the share price of of LinkedIn has crept back up but nowhere near the highs where it once was and then two days ago Monday uh in like what was gotta be one of the best kept secrets of major M&A of all time um Microsoft announces that they are acquiring the company for $196 per share um which comes to which comes to $26.2 billion total um which is a lot of money but maybe not but half of what LinkedIn was worth you know a year ago yeah I mean the thing that I wasn't thinking about in February when it's like there's two parts to arriving at this conclusion and I feel like within that first week I sort of understood like oh these companies are sort of undervalued right now because they took this huge hit and you know their their core business remained strong it was just that a new business that proposed that promised huge growth didn't quite materialize like they're still doing three billion in revenue a year and the thing that didn't occur to me at that time is okay these guys are on sale and that doesn't mean on sale just to go buy the stock that means like they're massively at a discount for somebody to acquire them and what you gotta start thinking then is but who are key acquirers where LinkedIn can be a massive asset and amplified by their existing business so so our job today uh is to speculate uh and think about was was man was this good was this a good move for for Microsoft for LinkedIn shareholders will we'll find out um well you know but I feel like we can't we can't dive into it just yet without mentioning a super important piece of context here which is that um about a year ago a little over a year ago there were tons of rumors swirling in the market that Microsoft was had made an offer to acquire Salesforce yeah and I think I think it was all but confirmed like that that that was actually you know came to the 11th hour and then fell through so the the the rumors and these are just rumors we will know maybe we can do a show on this at some point but um that would be fun um the rumors were that Microsoft offered somewhere between 50 and 55 billion dollars to acquire Salesforce a little over a year ago and Salesforce was willing to talk but they wanted 70 and uh and Microsoft walked away from that so super important and that played out in the press over weeks um and that two things with this both of this was completely kept quiet yeah and the the L.O.I. I think was signed a month ago yeah yeah uh and uh Jeff Weiner in his memo to LinkedIn employees mentions that you know the senior management team at LinkedIn has had quote months to digest this um which is pretty amazing and apparently it all started after after February 5th which says to me at Microsoft that not a lot of people knew I mean that this was this was something that was Bored Satya Key executives actually uh friend of the show Kurt Delbeni is uh very much involved in yeah um you know orchestrating how these two companies will come together Kurt who we were lucky enough to have on for our a compley and wonder list episode uh is um going to be leading the the uh integration for Microsoft yeah and actually the press release talks about how he's going to be doing that with um Scott Guthrie who leads Enterprise which includes both Azure and Dynamics CRM product and Chilu which um Chis per view is uh mostly kind of productivity so the whole office suite and Bing and so I think there's a little bit of clue there as to what they're going to do with it probably in office and then some combination of of Azure and feeling the Dynamics product yeah so well let's jump into um acquisition categories I feel like this will start to start to unpack this here what's your what's your early categorization here yeah so I mean I think there's a business line from acquiring the the you know um current revenue stream um but in my mind you know you don't buy this product just to um cash flow it like they're they're not buying that business line because it's it's gonna pay itself back and you know short order and we feel good about owning this new revenue stream it's an integration place so I'm calling this a product acquisition since it's a product that they're going to um amplify the current sales of with their their own kind of channel and and integrations and then make their own products uh better and um kind of define the future of of identity so I would say it's a uh a product acquisition to be combined with their existing products yeah I um I'm gonna take a a similar route um but I think this is really key so for me I said yes product acquisition um but it's a product acquisition that at least has the potential I think to transform and evolve an entire business line for for Microsoft so clearly this is I mean I don't know but I would imagine this is going to be within Microsoft's business process uh productivity and business processes segment um which is one of the new segments that satya stream line the company into when when he took over um and uh and and and I think you know there's so many ways angles to think about linkedin but one of them that you have to imagine people at Microsoft are thinking about is as a as a data set and a data acquisition and the ability to both operate link continued operate linkedin as the set of products that it is within that segment but then infuse that data into into office into active directory into dynamics into all of the you know the sort of mobile first cloud first you know world that Microsoft you know lives in now um all of the business um tools that they have uh you have to imagine is something they're thinking about yeah totally and that's a really good lead in I sort of have like four buckets of of why I think they they pull the trigger on this one and that first one you know you just nailed is integration with office 365 to extend identity outside the company in the world of of Microsoft of your they uh they have active directory um which we might want to say I'm worried about that because I bet a lot of our listeners have no idea what active directory is. Yeah great point um so basically Microsoft's lock-in and the enterprise comes from the fact that they own identity and everything that stems from that so everything works seamlessly with with their you know or historically works seamlessly across all their products because everything is is you know plugs into exchange and uses active directory to manage identity and it's it's you know the rock solid truth of who you are that everything in the company can plug into. Yep so when you as a employee at a company that uses the Microsoft productivity suite you know you sign in to your Microsoft account and then that gives grants you access to your email to office 365 to whatever enterprise app if you use Windows for the few people out there who use dynamics you know into dynamics uh right and and and even Windows yeah. You can think of it as like deeply deeply integrated single sign on and the nature of companies has changed and I think that that that we'll talk about trends in a little bit but I think that a big tech trend or really a big like world trend that's happened is people move around a lot. I mean people stay at companies for 18 to 30 months and there's a lot of bouncing around and people collect knowledge from all the different companies they were at and build reputation from all the different companies that they were at and a world that is entirely centered around you know who you are at this company is kind of antiquated. Yeah and this is such a good point. Company the company doesn't own your identity anymore you own your identity and you lend your skills and reputation to the company while you're there and some people do that for a really long time but some people don't and you have to have a way to be able to access and leverage all that other data. Yep and you know for Microsoft previously which is again trying to reinvent everything it's doing as Kurt talked to us about a few months ago you know in this you know mobile first cloud first world like when the reality is that the majority of employees at least in fields like tech or finance you know aren't staying in the same job for a long periods time anymore if you as Microsoft only have these very siloed views into people and not the their holistic view of their skills and their career history and their identity you know across jobs you know there we go hence LinkedIn. Yeah and the parallel I think I should that I wrote down anyways you know five years ago 10 years ago we had this like IT shake up where they are freaking out about BYOD bring your own device and this is the realization of BYOD when it comes to identity. Yeah BYOE bring your own employee BYOP your own person yeah and you mentioned well I was going to go into the sort of second things I think there's a good segue there the second reason we kind of talked about identity in office 365 there I think that as it extends to dynamic CRM it's hugely valuable to know an entire person's work history when you are trying to sell something to them. So imagining you know that the problem with Microsoft's world view before is this is John Smith and he was at company A there is also a John Smith at company B we don't know if those are related and and you know I'm sure there's like attempts to make sure they're related but the magical thing that LinkedIn nailed is all the incentives are aligned for them to make money off of you wanting to make all of your information accurate and so if you can have this like holistic view of identity when it comes to customers that's incredibly valuable also. Yep the I agree and I want to jump into with something I've been thinking about is with regards to this acquisition and Ben and I were texting about this earlier the way I think about LinkedIn is like it's such a canonical example of like the power of a network effect and the value of the asset of LinkedIn's network that they've built and I'll get into this in a little bit and tech themes but if you take for a given for the moment that the network effect and the the defensibility of that means that their professional network that they've built basically can you know never almost never be disrupted and Lord knows many people have tried over the years despite the products being really crappy and all these other things. What can you build on top of that and we talked about how LinkedIn isn't doesn't monetize via ads really you know they're sort of like they they did recruiting first that was the most obvious they nailed it like they own that industry but then it's also really obvious like they should do like sales and biz dev and partnerships and like you know like what I use LinkedIn for and probably many many of our listeners and they kind of really drop the ball there and then you think about like man could Microsoft with the LinkedIn network asset on top of that like really execute where LinkedIn hasn't I think there's a big opportunity there. Yeah and Ben Thompson agrees with you I pulled this quote it's getting to be not a question of if but how many times we'll mention Ben's prolific writing on the show but he is a quote in the Stratekri article about this as I do believe upside is magnified significantly by Microsoft should LinkedIn sales navigator for example sell into 100% of Microsoft Dynamics CRM user base a good portion of this deal would be paid for and that's just really interesting to think about is yeah you you raise a good point though the crux of the whole thing is can Microsoft leverage the network asset that LinkedIn has created better than they themselves have yeah and it's worth a word on like on sales navigator so this is this product that LinkedIn has put a ton of effort into and this is their attempt to execute and capture this sort of second pillar of value on top of the network with with sales and lead generation and the problem they've had is that like sales runs on the CRM this is why sales force is such a valuable company and unless you're directly plugged into the CRM like it's really hard to you know add a ton of value in and they've done a lot of integrations and you know sales navigator has had integration with sales force and with all the other CRM's out there but like it's really hard to do that and and for Microsoft like a they can plug it directly into dynamic switch has very small market share but they also have the way and through all the rest of the productivity suite including email the most important app for sales and many other many other you know professionally functions and to be able to plug all of LinkedIn's network asset into that like huge opportunity yeah and for everybody out there listens to or the work set a company that sells to businesses sales force has become kind of the operating system of the B2B company and if a product doesn't plug into sales force you're not using it because that's the central repository for how all the different departments of your company communicate with each other and it is the ground source of truth so I mean that Microsoft has always been the we power productivity and we enable enterprises to be the most productive and efficient they can with the use of technology or through the use of technology and that's been their their mission for a long time or at least one of their missions and to see sales force really like etching away at that it's almost like to defend that turf they had to do this yeah I want to let Ben get to his other two points but I want to add in really quickly like yeah I have to imagine so what's also really cool about this acquisition is as is the theme on this show we'll get to find out all the nitty-gritty of how it happened when the SEC finally come out when the when the deal closes which they said is is this year which likely means late December yep and I'm really looking forward to that because I have to imagine that if they're there there must have been at least one other biter here or the price wouldn't have gone this high if not multiple others but I got to imagine the other biter with sales force has to be and this is this is awesome this is leading right into point three for me somebody else was going to buy them like that they're on sale there's only one LinkedIn like the magic of network effects makes it so that you know they were the source of truth for where an employer has been and what they've done with their good at even though their skills and endorsements thing is a little bit of a joke they there was only one so you couldn't go out and buy the other LinkedIn or build the other LinkedIn it was like there was this one super valuable asset and that's sort of an interesting M&H trend because of the you know network effects and technology today it makes them immensely more valuable and it creates these these abs there's certainly a bidding war here so when you're considering the value of this and your Microsoft and you get approached by the investment banker that sort of put this together and said hey what do you think about this which I believe was Frank with Tron again we will fact check this but let's see I know LinkedIn was advised by catalyst yeah Frank with Tron cool and Microsoft I'm organ Stanley um you got to be thinking with the hat not of boy is this worth you know 25 26 million dollars but more with the hat of what is the opportunity cost of it going to someone else and what's the capital outlay that we need to make in order to not have our lunch eaten and it it taking a step back from that it's sort of interesting companies more so these days than ever have to look at M&A as a competitive threat and have the means the borrowing means or the cash on hand means to do what they need to to defend their turf against a massive landscape shift like this yeah I mean like uh let's just take as an example um what if Twitter had acquired Instagram I mean I remember when like early days Instagram like my primary use case for it was posting pictures to Twitter um so like you totally could have seen the rationale for that to happen yeah like how awful would that be for Facebook right now yeah not good not good the the other interesting thing that I I sort of danced into here a little bit is um Microsoft did not pay for this in cash and we haven't this is off in the case well they they did but they didn't do it so well right right they did not pay for it in the cash that they carry on their balance sheet they um they took out you know a large amount of debt because 94% of their assets are yeah I'm sorry their cash is held overseas and you know with the 40-ish percent um tax that they would have on unbring that back home they Patrioting the cash yeah this is a huge problem for um all companies uh that are multinational center headquartered in the US but tech companies especially have yeah a big problem with repatriating their cash so what so what they did um this was not a stock deal it was all cash consideration that LinkedIn shareholders are receiving um but they uh Microsoft took out debt to to finance the transaction yeah and I think not entirely they took out like it's not you know 26 billion dollars of debt but it was a large part of the yep financing the transaction so um yeah you know I think that that getting back to David's point it's like there was one single huge asset with network effects here and the question is can Microsoft you know squeeze more revenue out of it than LinkedIn was doing themselves I mean will they is uh we will see uh can they answer is in my mind 100% yes yeah yeah and then getting into my fourth point this is a little bit more broad but um so Microsoft has uh you know admitted that that when windows is not the future that they are not the windows company going forward they of course they know large amount of people working on windows huge revenue stream but it's it's operating systems are not the solo cash cow that they once were and I shouldn't even say operating systems windows is not and so in moving to this mobile first cloud first company and focusing on um you know they're they're cloud offering as you look up and down the cloud stack they've infrastructure as a service and platform as a service with Azure they have software as a service with office 365 and you could look at this like okay they're becoming the cloud services company so um a business tools for recruiters and more broadly for sales and marketing also is a cloud offering that they can add to that stack of services they provide and so I think like you put on your old Microsoft hat you're like what are they doing and like they typically squander large M&A so this is terrible it's not going to go well you put on a talk to a bunch of current informer Microsoft employees about this and that that is the most common reaction I would say yeah yeah yeah so I'm I'm dying to get to tech themes but before we do I think we I think it's worth a minute spending a minute on the what would have happened otherwise we talked a little bit about somebody else buying LinkedIn I think that's probably most likely clearly they were on sale as you say in more ways than one but I think um you know if the the other route is let's say LinkedIn and manage to stay independent you know they never they're having a hard road executing on building another pillar of monetization on top of their network asset but I want to throw in here some a bit of discussion that's come out in the press I think is relevant that that somebody pointed out and I believe there's a I believe there's a New York Times article about this linkedins stock-based compensation has grown hugely in the last few years and it actually was becoming a real problem for them so stock-based compensation as probably many of our readers know you know it's as a maiden concept in startups but also in public companies where part of your equity package as an employee is you get a salary but then you also get stock options in the company and and linked in had basically over the last couple of years been giving away huge amounts of equity to employees and that delutes the existing shareholders so it's a non-cash expense so it doesn't show up in like EBITDA metrics and stuff like that but stock-based comp at LinkedIn went from 13 million a quarter in 2012 to 222 million per quarter in the first quarter of 2016 and the problem there is like well if you start doing that and compensating your employees obviously I'm a huge believer in employee equity but you know there's the thing about cap tables is like there's only ever a hundred percent like you can't have more than a hundred percent of the equity in the company so anytime you give more out you're deluding everybody and so it was like the the LinkedIn stock had become this sort of like leaky sieve that was happening so that was a major problem that they would have had to deal with but now they don't yeah I think what happened otherwise I I you know they would have gotten sold the sales force and in that case I wonder for the future of what Microsoft is doing with dynamics if they lose out on this deal because I feel like that's a nail in the coffin for sales force you've been a nail in the coffin for dynamic yeah if yeah all right let's go into let's jump in the tech themes because this is man I've said this to so many people over the years you know that as a investor I've been such a huge fan of LinkedIn and continue to be David when did you buy LinkedIn stock I bought right after the IPO and then I bought a bunch more after February 5 and the reason for that is you know like we've been discussing you know there are major challenges for the business and the company but to me there is so few real true network effects that exist in technology and LinkedIn's is so powerful I don't believe that anyone perhaps you know ever ever is a long time but anytime in the foreseeable future we'll be able to disrupt LinkedIn software alone is just software like it's just commodity somebody will build something better it will come along but and LinkedIn is such the classic example like it looks like crap like that's all be honest like the product is really bad at this point hasn't yeah you have like 10 second page load times it's really really bad but like nobody will ever be that like I will always use it I'll use it every day because everybody and you interact with is on it and if I leave and go somewhere else they're not on it you know so like yeah and the only thing like I can envision a future where people chip away in verticals and then those verticals expand but we're a ways out from that and the couple things I'm thinking of are you know when recruiting developers it's very common to start on GitHub exactly and then all of a sudden there's all this data that is not actually in LinkedIn that's so much more actionable and it's like oh it's just the the mirror you know breadcrumb trail that they've left from doing their work creates a much richer profile or you can imagine sort of the same thing on angel list like it it moves out from founders and VCs to employees and then people are actually incentivized to keep their angel list profile up to date that proliferates to other industries design there's company called behance that Adobe bought that was doing this totally agree if you were going to attack LinkedIn this is the only way to do it because it's the only way where you can actually get enough critical mass like a network is is of zero value until it is of critical mass value and then it is of like completely defensible value but but it's I really think it would it would be a fool's errand to try and build a horizontal wide-based professional network at this point yeah I mean in the same way that it would be foolish to build a horizontal video hosting platform at this point or a horizontal pure social network like I think the era of horizontal platform horizontal platforms once they have network effects applied you don't disrupt them by building another horizontal platform and I think that you know that's that's that's just an interesting thing to note when you're thinking about starting new startups because I've heard so many people say LinkedIn sucks I'm going to try and on seed it and disrupt LinkedIn and like yeah we all have our product qualms but you're not going to do it by creating a better horizontal LinkedIn yep and and I think this please for me what one point I want to bring up about the acquisition that please really strongly in here is LinkedIn like they're smart guys right like and Gels like they get this so what has LinkedIn been more terrified of than anything else in its history it's people exfiltrating the network right off of LinkedIn and and stealing it out and bootstrapping and competing with them and LinkedIn is famously like just iron fisted and their their terms about no their API limits or your ability to store data that you retrieve from LinkedIn that they have the most locked down quote unquote open API yeah API is a joke it is a utter joke and so one of the things that gets me really excited about LinkedIn being part of Microsoft as a as a as a user as a user of products and as a you know as as somebody who is has a huge vested interest in innovation in the future is man could this mean the dawn of a real LinkedIn API because Microsoft has a very different set of motivations than then LinkedIn and so long as they keep the network effect locked so long as they keep the network but it'll also be embedded into all of Microsoft products right and right Microsoft is is also a developer facing company and so like if they open up the LinkedIn API to I mean I think about like even like venture capital firms like so many firms are building data you know tools internally for themselves to be able to identify people who might be founders great founders before they start companies or people who might be interested in joining startups before they do who are really talented and you've just been totally hamstrung because you can't really use the LinkedIn API very well but if now all of a sudden you can like man think about all the cool products and services they're going to be able to be able to be able to buy that you can I'll just caveat this with like David remember venture capitalists are a niche market yeah exactly exactly but there's so many more examples too yeah good point should we grade it um um yeah I think there was one oh I have a question I want to post to you yep um so there it is in Microsoft's interest to integrate LinkedIn with all their products keep in mind Microsoft also owns now the link LinkedIn product and has an incentive to make that revenue stream profitable so do they which it is on without accounting for a stack base compensation yep um or I should say as successful as possible do they do a bunch of Google apps integrations also Microsoft starts to encounter or potentially could encounter will be interesting to see I navigate this the platform versus product tensions where you know famously they didn't want to release office for iPad because as you know all too well because it competed with the competitive advantage that that surface had or you know in a million other ways you know office and windows always having tension do you run into a scenario here or is there a clear um you know subservient product and leader product where it's nope we're not focused on growing LinkedIn through other people's integrations and that is a sole you know source of value for other products at Microsoft I mean I got to imagine I'll be really disappointed in Microsoft and Satya incurred and everybody if they take the the old school Microsoft approach I can't see them doing that shot fired but I mean like you know this is this is the whole thing about you know Satya's leadership in Microsoft is like the way that this company becomes relevant again and and and and and down the an innovator again I mean something argue relevant again like technology moves fast right it's like Ferris Bueller you know you you might miss it if you don't stop and look around everyone's no while but man like you know office on iPad like I want to be everywhere where you are and like so if if LinkedIn all the value that they're gonna hopefully go try and create in in you know bringing LinkedIn to sales and other verticals isn't on Salesforce too like you know that's a big fail for them yep um okay conclusion what do you got Ben uh and so we how are we gonna do this like this is um are we grading like right now the buy or we predicting the future and thinking like yeah put yourself five years from now was this a good purchase for this price so I mean I think like today sitting here I say this is a great buy because a year ago ish you know LinkedIn was worth twice this much and it's this incredibly unique incredibly defensible asset that is now part of Microsoft so I'm like huge thumbs up um but by that rubric you know god it's really just gonna be like can they execute on this you know the opportunity is massive but but with great you know with great opportunity comes great you know there's a lot of complexity here and it is very difficult to do these things um it's all gonna come down to execution so right now I'm gonna give it uh I'm gonna give it an aim a minus right now just accounting for the huge amount of risk to to come in the execution how are we both positive on this I was gonna give it an A like I woke up my day morning being like what and here I am all right but here's here's I have some a couple rationales but one is you know in November of 2015 the stock price was at $255 okay so not quite twice as much but right and and they they bought it for what one one 90-ish um I you know I don't think the company is actually worthless and if you look at it like it's 25 or what is it they bet it for 26 billion and it was it's a little over three billion in revenue so like an 8x you know yeah right I mean like there's a to acquire a very you know a sort of premiere um internet and SaaS company for seven to eight X revenue like those companies were trading on the public markets at 10 to 15 X revenue like a year ago you know before accounting for any kind of liquidity premium you know M&A premium so like yeah great bye yeah so that that's operating under the assumption that LinkedIn continued its trajectory you have the the risk that typically comes with a startup acquisition start up at any M&A thing of of integration failing can't really consider LinkedIn a startup no of integration failing and you know there's the bigger the acquisition the far farther you can fall and a 26 billion dollar write down would be truly like that a gut punch and I think um you know this kind of comes down to two things I think they needed to make this acquisition or acquisitions like this because that's their future bet there they're this cloud services company and you know this is a cloud service that is right in their wheelhouse delivering value to enterprises to make them more productive and efficient and do their best work possible the question is could they did they need to do large M&A to do it like they they need a product offering like this for companies they weren't going to build their own LinkedIn that was going to fail miserably um you know what what else could they possibly have done I think I do have faith in this new Microsoft much more so than the Microsoft of old days that is famous for flubbed um flubbed M&A yeah and I think when I say old days I'll just say under Steve Balmer and um you know I think with sottis leadership and the people I really have a lot of faith in the people leading these integrations and I think that like you know we'll probably end up doing a follow-up episode one way or another but well here's so here's something interesting that we haven't talked about it all on this episode but I think it's really relevant this is by far the biggest acquisition we have covered on this episode like the scale of this like this maybe I'm just trying to do some quick math in my head but like the value of this acquisition is approaching the combined value of all the other companies we've talked about combined um maybe slightly less but it's like on the same you know it's in the same ballpark we haven't done what's up yet we haven't done what's up yet so you know um is linked is Microsoft buying linked in worth uh you know what we got here picks our Instagram twitch bungee Siri Lucasfilm YouTube but commonly rightly you know for like who has a lot of money yeah I don't think you can really look at it through that lens you have to look at it like what was the cost of not doing it yep and I think you got to pull the trigger yeah well um that's off uh for now at least to uh Microsoft and uh and all our friends over there yeah and and uh and to and to you know folks at LinkedIn yeah the big the big question will be like can these cultures mash um you know are they get uh linked in has offices all over the world but primarily centered in Silicon Valley Microsoft typically doesn't do well what their Silicon Valley campus is but as we as Kurt talked about a few months ago like you know they have a new mindset when it comes to M&A of like yeah we don't care where you are like you know you can be in uh you may wonder a list here in Berlin you can be a complete me in Silicon Valley like it doesn't matter you know yeah just a lot of flights yep fortunately they're close well fortunately um you know Alaska Bob version so that's it that's a great place to leave that's a great place to leave it do you do you want to do a quick carve out yeah yeah uh mine mine super quick because I think a lot of people probably will have seen it already but um the code conference was uh last week and it was bookended by Elon and uh and Jeff Bezos and I haven't watched the Jeff one yet but the Elon Musk one is so fantastic so go watch the Elon Musk interview at the code conf um he he just like has this incredible way of dancing back and forth between like total dude in a space suit that is like talking about the future in a way where you're like what is this where is this the one where he says uh there's like an 80% chance for living in a computer simulation yeah yeah but then there's other things where like the way that he explains why the um first-age rocket lands on the drone ship it unfortunately it blew up today but you know the last four have landed on the drone ship he he does a really good job of like explaining why the drone ship needs to be where it needs to be and position the ocean and for anybody that's sort of like into the space x story understanding any of the physics behind that super approachable very interesting and clearly a visionary cool I I am I'm grinning widely here because uh literally no joke was my my my carve out was was the Bezos talk so this is great because I have not yet watched the Elon talk so now I got to watch it and you got to watch and everybody listening has to watch the Bezos talk it is fantastic um you know he uh man that guy is just awesome um but uh um one of my couple quick things I love from it um you know one you know they ask him like what uh you know god there's so much going on in Amazon like how do you think about this like how do you think about your businesses and he says and I think about innovation he's like I like to think about when I'm starting when we're starting a project or something super ambitious uh you know like Alexa or whatnot like um what about our customers isn't going to change uh you know over in the first people future like um you know so much is changing so fast in technology but what what are what are the like core things that are not going to change um and and also that that reminds me of LinkedIn you know like I sit here today like I was a LinkedIn happy LinkedIn shareholder for a long time because I just sat there and I was like I'm going to be using LinkedIn 20 years from now no doubt in my mind you know so anyway there we go code conference it was good this year awesome well uh we're leaving you um I'll say one more time because I think it's probably more useful at the the end of the episode than the beginning um would love it if you could leave us a uh uh review on on iTunes and uh if you liked it show the episode with your friends see you