What's going on?
Microsoft has agreed to buy the professional social-networking site LinkedIn for a whopping $26.2 billion of cash in a mammoth tech deal.
What does this mean?
It’s a huge step, even for a juggernaut like Microsoft, to spend so much money acquiring a company in an attempt to boost its future growth. The idea is that by incorporating LinkedIn’s technology and network of customers, Microsoft will be able to complement the products it already sells to businesses (e.g. LinkedIn could start operating within Microsoft’s Office 365). You can imagine that, since a lot of businesses use Microsoft Office as a platform and lots of business people use LinkedIn as a resource, there will likely be ways in which the two platforms can work together (see the CEOs explain the rationale for the deal in this video).
Why should I care?
For the stocks: LinkedIn stock jumped a lot, but investors appear concerned for Microsoft. The takeover price of $196 per share is below LinkedIn’s all-time high of $270 but double where the stock traded in February (after the company downgraded its expectations for future user growth). Microsoft’s stock sold off almost 3% on the news, presumably on investor scepticism that this deal will actually boost Microsoft’s future growth enough to justify the $26 billion price.
The bigger picture: This is a “positive” acquisition. A number of large mergers and acquisitions have been announced in recent months, but most of them have occurred because the combined entity can achieve cost cuts. While that might be good for the companies involved, it’s not necessarily good for the overall economy (if, for example, workers are losing their jobs or less money is being spent on developing new products). With this deal, there will be very few job cuts and, instead of cutting costs, Microsoft is aiming to use LinkedIn to propel its own growth – and ultimately become a bigger company that, hopefully, generates more profit and employs more people.