Acquired - Episode 14: LinkedIn

Episode Date: June 16, 2016

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?Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Items Mentioned On The Show: Adweek: Snapchat Launches a Colossal Expansion of Its Advertising, Ushering in a New Era for the AppThe Facebook Effect - David KirkpatrickLinkedIn’s Series B pitch deck  LinkedIn’s S-1Microsoft and Apple Double Down - Stratechery NYT Dealbook on stock based compensation at LinkedIn Josh Elman - When people get confused about “BS metrics”Fred Wilson: The Dentist Office Software StoryThe Carve Out: Jeff Bezos at Code 2016 Elon Musk at Code 2016

You are not yet schooled in the power of network effects, young Gilbert. We'll cut that. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight Another story on the way

Who got 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 is special, Ben. 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 recording. And super speculative, but I think the whole internet is sort of a buzz with, you know, what's the deal with 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 throw out some possible paths and draw some conclusions. Yeah, we're going to have some fun with this. I don't think we've ever gotten as many requests

on Slack and email and other channels for no please talk about linkedin so here we are and in fact i think um 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 that didn't go well, things that didn't go well. Really anything that's got a good story. We love stories here. We do. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation, and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every

corner of your business. Yep. And as you know, from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other, and they continuously improve,

handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and Agentech AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. A little bit of administrative before we dive in. As usual, I'm going to ask, please review us on iTunes. It makes a huge difference, and it's what makes the show grow and tick.

Share it on Twitter, Facebook, or even LinkedIn. Please share it on Microsoft LinkedIn whenever you can. For those of you who 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 going to post this on Product Hunt. So search for it on Product Hunt. We would love an upvote there. Yes, please. Thank you as always. And feel free to join the Slack group. It's really awesome interacting with all you guys. We've got over 100 people now and great discussion going on. So 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, you want to talk about Snapchat? Yeah, we're going to add a... Sometimes we'll have this, sometimes we won't, but 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, our favorite Oracle here on Acquired, tweeted that the LinkedIn acquisition and WWDC were 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 uh big profile in ad week though um talking about the launch of this api uh and um and and profiling the company worth reading we'll link to it in the show notes um 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 I'm actually not sure if this is an announced product or even maybe just like a relabeling of an existing one. But I tapped on what looked like a Facebook instant article this week and it expanded into a native

ad unit. 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 ad unit. But it's really interesting to see them potentially expanding that instant articles or instant ads umbrella to include these other things and having a real sleek experience with it. Yeah, and cool with both of these that, you know, the ad 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 both of these fronts.

Yeah. So. Yeah, yeah. Cool. All right. With that. 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 network on LinkedIn. Spam your address books. we'll get to that okay so um linkedin i think i could be wrong on this

but i think was the very first um uh spin out not spin out but um progeny of the paypal mafia 2003 2002 so uh paypal was acquired uh 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 Reid Hoffman band together and they form a new company and they call it LinkedIn. And so they start in December and then they work really quickly and they launch an MVP very quickly, especially again, this is like pre-AWS time. They launch an MVP in May of 2003 and it is a social network and social networks are hot then. 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 realized that social networking was

going to 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, um, you know, with, with Friendster right around then. Yeah, that's what I was going to say. There's a group of ex-PayPallers and other kind of close people that were like, you know, technology is 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 there was this, in Silicon Valley, this kind of swelling of interest and building of social networks. Facebook hadn't even been started yet, but Friendster was a super hot company.

They had raised money from Ben a benchmark and somebody else. I can't remember, but we're darling of Silicon Valley. Um, my space was growing quickly. And Reed Hoffman and Mark Pincus both put money into Friendster, if I recall. I think that's right. I think that's right. Yeah. Um, anyway, so they start so they launch in May of 2003. And they have a really 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 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 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 100 million dollar suit later on for for this but um you know once they had the network right then you wouldn't have that way you know they would have to pay the price later. They got sued. I think it was $100 million suit later on for this.

But, you know, once they had the network, they had that lock in. Right, then you wouldn't have the network. You know, and this is like a total recurring theme in network-driven technology companies. Like, you know, doesn't get talked a lot about these days, but it's on the internet. Like Airbnb totally did this, you know,

off of Craigslist to bootstrap their supply network to start. And many many many other networks have done the same thing and do you know about microsoft's like price per core thing we talked about this on the show i don't think so price per cpu they basically put it when they were originally selling windows or maybe it was dos real early on they were um 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 squashed 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 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 squashed the competition and we're totally way out ahead it's totally you know when you're facing a cold start problem as a network you know the chicken and egg problem like you can't you know you gotta have something to some unfair advantage to as a network you know the chicken and egg problem like you can't you know you gotta have something to some unfair advantage to get through it you know doesn't always have to be illegal but uh in many cases it turns out it was um so uh late by late 2003 the network is starting to take off a little bit it's still really early. They raise a Series A from Sequoia,

$4.7 million, which was a lot of money back in that day, especially after the internet bubble had burst. And Mark Kwame joins the board. Later, when he left Sequoia, Mike Moritz takes over and is still, to this day, I believe, on the board of LinkedIn. And Mark Kwame is now in Columbus, Ohio, running Drive Capital. Exactly. Ben's hometown. Columbus, shout out. Shout out. 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 when we talked about with YouTube and through the lawsuit of YouTube, we were able to see Sequoia's investment memo about that. Two years ago, Reid Hoffman open sourced, quote unquote, his pitch deck for his Series B Greylock. And it's this great document. 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 he's like this was you know obviously this worked but like i 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. Cool document. So in the pitch deck, you know, he kind of, the LinkedIn positions, they position it as like the unbiased sort of, you ground source of 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 information publicly available on the internet about professionals and where they are and how to find them. And turns out, they were right. As we talk about this acquisition, LinkedIn has never been primarily an advertising-based network, advertising-based business. They've had ads as part of their business line, but most of their revenue comes from monetizing recruiters. 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. 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 Ellman has a great post that I'll put in the show notes to Josh. He was at LinkedIn. He's been at a bunch of great companies and he's at Greylock now. And he has a great post talking about, you know, you can't look at this like, you know, are the users of LinkedIn really like X 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 high value product, which is browse and access to these people. Yep. And it's interesting later, we'll get in a minute to LinkedIn's IPO, but actually in the

IPO prospectus, they list in the risk factors, 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. 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 you being found. So they build these business lines over time, but there are three that LinkedIn has. And the first is what they call talent solutions. And that's about 60% of their revenue.

And that is for recruiters. 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 per seat. And I think the cheapest way to go to LinkedIn premium is like $600 a year. It's $100 a month 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, 1200 a year. Yeah. So think about that every time somebody contacts you and has the little, uh, 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, 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, recruiters because they're going to be hamstrung from day one. So they've created this just incredible expectation in the market that that is a table stakes tool to have. Table stakes. And they've captured a ton of value in that market. So then the other two business lines they have, the second one they call marketing solutions, and that is primarily ads that they show in various forms on the site, whether it's sponsored in mail or all sorts of things. And then the third one is premium subscriptions.

So this is what they've spent a lot of time on over the last few years. And that's monetizing members of LinkedIn who are not recruiters. Oh, so 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, uh, to broaden out beyond your second degree network, um, on LinkedIn. And that's great. Like as I mean, I use it all the time. I mean, as a, as basically this tool was meant for venture capitalists, I think, and business development folks and sales folks. And that's about 20% of their revenue too. And that's about 3 billion a year in revenue, I think.

Total? Yeah. Yeah. I think that I actually did not look that up. Yeah, I think that's about right. and and that's a about 106 million users 106 million active users uh just about 400 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 2000, I believe it was 2007. Yep. Reed actually steps aside as CEO and they bring in

an outside CEO to run the company. Reed stays at the company day to day, a guy named Dan Nye. So this isn't actually talked about much. He didn't stay very long. He was there less than two years. Came from Intuit and then he was at Advent Software. He went on to become CEO of Rocket Lawyer. And which reminds me a total, I found this doing research for the show, an aside, but really kind of hilarious. When they raised their Series C, which they did in uh in january of 2007 right before this happens um they they raised bessemer led it but they also had this other firm that i hadn't heard of uh in there called the european founders fund 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 these are the the guys that run rocket internet rocket lawyer made me think of it um in uh in europe that you just copycat all the u.s businesses and i 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 they're just copying founders fund just like they do with many other businesses so hey man it works for them um so uh i just i just saw that 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 weiner and he is still today the CEO of LinkedIn. And even will be inside Microsoft. Exactly. Yeah. And will remain so within Microsoft. In January of 2011, the company finally files for an IPO. They go public in May of 2011 um they price uh they price the ipo at 45 a share it trades up to 94.25 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 two thousands. Um, and it was shortly thereafter that Facebook went public, um, that,

uh, Pandora went public, that Twitter went public. Um, so this was a, 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 know, even though Facebook makes money in a very different fashion from LinkedIn. Um, but when they, when LinkedIn, you know, filed their prospectus for the IPO, people were 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 stock continued to do really well for over the five-ish years that it was public, going up into the 200s and above. Until what? February of this year? just a few months ago was on a Friday, both LinkedIn and Tableau announced fourth quarter 2015 results and expectations for the year to Wall Street.

And it was like Black Friday for software companies. Yeah, and it actually killed the private company valuation and some of the market cap of other SaaS companies. And it felt like it was super sensationalized and not well understood by the market. Yeah. Because LinkedIn... So LinkedIn announced earnings. They actually beat expectations on earnings for the fourth quarter of 2015. But they announced guidance that was lower than Wall Street expected for 2016, and the stock got hammered.

It was down 43.6% in a single day. $10 billion in 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 can't count on this continued growth in the future, which had been priced into their stock. And so I think while that core business was still strong, they were looking for secondary revenue channels. 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, I don't remember what that was called. It was a-

Lead- Sales Navigator. product um drawer what that was called that that was it was a uh lead um sales navigator sales navigator they still have i'm working on but the growth that 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 LinkedIn had a market cap of over $50 billion. And between that and then the those two companies you know announcing weaker than expected earnings the whole sas sector public sas companies just took a big hit so like on that on the same day on friday new relic down 23 percent zendesk down 20 percent hubspot down 20 percent workday down 16%, NetSuite 15%, Click14, Demandware,

which ends up getting acquired by Salesforce last week, two weeks ago, was down 13%. Salesforce itself was down 13%. It was just carnage. Also, nice research. Thank you, internet. And so then for the last couple months, the share price of LinkedIn has crept back up, but nowhere near the highs where it once was. And then two days ago, Monday, in what was got to be one of the best kept secrets of major M&A of all time,rosoft announces that they are acquiring the company

for 196 dollars per share um which comes to which comes to 26.2 billion dollars total um which is a lot of money but 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 core business remained strong. It was just that a new business that promised huge growth didn't quite materialize. They're still doing $3 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 they're massively at a discount for somebody to acquire them. And what you got to start thinking then is, who are key acquirers where LinkedIn can be a massive asset and amplified by their existing business. So our job today is to speculate and think about was this good? Was this a good move for Microsoft, for LinkedIn, for shareholders? We'll find out. But I feel like we can't dive into it just yet without mentioning a super important piece of context here, which is that about a year ago, a little over a year ago, there were tons of rumors swirling in the market that Microsoft had made an offer to acquire Salesforce. Yeah, and I think it was all but confirmed that that was actually, you know, came to the 11th hour and then fell through. So the rumors rumors and these are just rumors we won't know maybe we could 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 Microsoft walked away from that. So super important. And that played out in the press over weeks. And two things with this. Both of this was completely kept quiet. Yeah, and the LOI, I think, was signed a month ago. Yeah, yeah.

And Jeff Weiner, in his memo to LinkedIn employees, mentions that the senior management team at LinkedIn has had, quote, months to digest this, which is pretty amazing. And apparently it all started after February 5th. Which says to me at Microsoft that not a lot of people knew. I mean, that this was something that was bored Satya, key executives. Actually, a friend of the show, Kurt Delbeny, is very much involved in orchestrating how these two companies will come together. Kurt, who we were lucky enough to have on for our Accompli and Wunderlist episode, is going to be leading the integration for Microsoft. Yeah. be doing that with Scott Guthrie, who leads enterprise, which includes both Azure and Dynamics CRM product, and Qi Liu, which Qi's purview is 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 Azure and fueling the Dynamics product. Yeah. So, well, let's jump into acquisition category because I feel like this will start to unpack this here. What's your early categorization here? Yeah. So, I mean, I think there's a business line from acquiring the current revenue stream. But in my mind, you don't buy this product just to cash flow it.

They're not buying that business line because it's going to pay itself back in short order, and we feel good about owning this new revenue stream. It's an integration play. So I'm calling this a product acquisition since it's a product that they're going to amplify the current sales of with their own kind of channel and integrations and then make their own products better and kind of define the future of identity. So I would say it's a product acquisition to be combined with their existing products. Yeah, I'm going to take a similar route. But I think this is really key. So for me, I said, yes, product acquisition. But it's a product acquisition that at least has the potential, I think, to transform and

evolve an entire business line for Microsoft. So clearly, this is, I don't know, but I would imagine this is going to be within Microsoft's business process, productivity and business processes segment, which is one of the new segments that Satya streamlined the company into when he took over. 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 data set and a data acquisition and the ability to both continue to operate LinkedIn as the set of products that it is within that segment, but then infuse that data 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. All of the business tools that they have, 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 why I think they pulled 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 Microsoft, if you are, they have Active Directory. Which we might want to say a word about that because I bet a lot of our listeners have no idea what Active Directory is. Yeah, great point. So basically, Microsoft's lock-in in the enterprise

comes from the fact that they own identity and everything that stems from that. So everything works seamlessly with their, or historically, works seamlessly across all their products because everything plugs into Exchange and uses Active Directory to manage identity. And it's 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 sign in to your Microsoft account and then that grants you access to your email, to Office 365, to whatever enterprise app, in fact, even Windows. For the few people out there who use Dynamics, you know, into Dynamics and even Windows. Yep. You can think of it as like deeply, deeply integrated single sign-on. And the nature of companies has changed.

And I think 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 who you are at this company is kind of antiquated. Yeah, this is such a good point.

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 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, aren't staying in the same job for long periods of time anymore. If you, as Microsoft, only have these very siloed views into people and not the holistic view of their skills and their career history and their, 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 shakeup where they were 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 thing because 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 that the problem with Microsoft's worldview 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 I'm sure there's 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 holistic view of identity when it comes to customers, that's incredibly valuable also. Yep. I agree. And I want to jump into something I've been thinking about with regards to this acquisition. And Ben and I were texting about this earlier. The way I think about LinkedIn is it's such a canonical example of the power of a network effect. And the value of the asset of linkedin's

network that they've built and and i'll get into this in a little bit in tech themes um but if you take for a given for the moment that the uh the network effect uh and the the defensibility of that means that their professional network that they built basically can you know never almost never be disrupted. And Lord knows many people have tried over the years, despite the product being really crappy and all these other things. What can you build on top of that? And we talked about how LinkedIn doesn't monetize via ads, really. They did recruiting first.

That was the most obvious. They nailed it. 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 um and probably many many of our of our listeners um and they kind of really dropped the ball there um and then you think about like man could microsoft with the linkedin network asset on top of that, 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 has a quote in the Stratechery article about this.

I do believe upside is magnified significantly by Microsoft. Should LinkedIn sales navigator, for example, sell into 100% of Microsoft dynamic CRM user base, a good portion of this deal would be paid for. And that's just really interesting to think about is you raise a good point. The crux of the whole thing is, can Microsoft leverage the network asset

that LinkedIn has created better than they themselves have yeah and 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 um and and lead generation And the problem they've had is that like, sales runs on the CRM. This is why Salesforce 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 Salesforce and with all the other CRMs out there.

But it's really hard to do that. And for Microsoft, A, they can plug it directly into Dynamics, which has very small market share, but they also have the weight and through all the rest of the productivity suite, including email, the most important app for sales and many other, many other, you know, professional functions. And to be able to plug all of LinkedIn's network asset into that, like huge opportunity. Yeah. And for everybody out there that listens to, or that works at a company that sells to

businesses, Salesforce has become kind of the operating system of the B2B company. And if a product doesn't plug into Salesforce, 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, 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 mission for a long time, or at least one of their missions. And to see Salesforce really 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. 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 filings come out, when the deal closes. Which they said is this year, which likely means late December. Yep. And I'm really looking forward to that because I have to imagine that if there... There must have been at least one other bidder here or the price wouldn't have gone this high, if not multiple others. But I got to imagine the other bidder was Salesforce. Has to be.

And 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 and what they're 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&A trend because of the network effects and technology today. It makes them immensely more valuable and it creates these, there's certainly a bidding war here. So when you're considering the value of this and you're Microsoft and,

you get approached by the investment banker that sort of put this together and said, Hey, what do you think about this? Um, which I, I believe was Frank Cotrone. Uh,

again, we get, we'll, we'll fact check this, but, um, let's see. I know LinkedIn was advised by... Catalyst.

Yeah, Frank Quattrone. Cool. And Microsoft by Morgan Stanley. You got to be thinking with the hat not of, boy, is this worth $25, $26 million, 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 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. Like how awful would that be for Facebook right now? Yeah, not good. Not good. The other interesting thing that I sort of danced into here a little bit is Microsoft did not pay for this in cash. And we haven't, this is often the case. Well, they did, but they didn't do it. Well, right, right. They did not pay for it in the cash that they carry on their balance sheet.

They took out, you know, a large amount of debt because 94% of their assets are held overseas. Their cash, yeah. I'm sorry, their cash is held overseas. And, you know, with the 40-ish percent tax that they would have on bringing that back home. On repatriating the cash. Yeah, this is a huge problem for all companies that are multinationals and are headquartered in the U.S., but tech companies especially have a big problem with repatriating their cash. So what they did, this was not a stock deal.

It was all cash consideration that LinkedIn shareholders are receiving, but 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 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 squeeze more revenue out of it than LinkedIn was doing themselves? I mean, will they is we will see. Can they? Answer is, in my mind, 100% yes. Yeah. Yeah, yeah.

And then getting into my fourth point, this one's a little bit more broad. So Microsoft has admitted that Windows is not the future, that they are not the Windows company going forward. Of course, a large amount of people working on Windows, huge revenue stream. But its 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 their cloud offering, as you look up and down the cloud stack, they have infrastructure as a service and platform as a service with Azure. They have software as a service with Office 365. And you can look at this like, okay, they're becoming the cloud stack. They have infrastructure as a service and platform as a service with Azure. They have software as a service with Office 365.

And you can look at this like, okay, they're becoming the cloud services company. So 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 talk to a bunch of current and former microsoft employees about this and that that is the most common reaction i would say yeah yeah all right listeners our next sponsor is a new friend of the show huntress huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to midsize businesses and provides enterprise grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech. It's about real people providing real defense around the clock. So how does it work?

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000 businesses now using huntress and they rave about it from the hilltops they were voted by customers in the G2 rankings as the industry leader in endpoint detection and response for the eighth consecutive season, and the industry leader in managed detection and response again this summer. Yep. So if you want cutting-edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. So I'm dying to get to tech themes. But before we do, I think it's worth spending a

minute on 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 the other route is, let's say, LinkedIn managed to stay independent. 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 a bit of discussion that's come out in the press that I think is relevant that somebody pointed out. And I believe there was a New York Times article about this.

LinkedIn's stock-based compensation has grown hugely in the last few years and it actually was becoming a real problem for them. Um, so stock-based compensation, uh, as probably many of our readers know, you know, is a main 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 LinkedIn had basically over the last couple of years been giving away huge amounts of equity to employees and that dilutes 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 if you start

doing that and compensating your employees, obviously, I'm a huge believer in employee equity. But the thing about cap tables is there's only ever 100 like you can't have more than 100 of the equity in the company so anytime you give more out you're diluting everybody and so it was like the the linkedin stock had become this sort of like leaky sieve um that was happening so that was a major problem that they would have had to deal with but then now they don't interesting yeah i think what happened otherwise i i you know they would have gotten sold to salesforce 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 salesforce you mean a nail in the coffin for Dynamics? Yeah. All right. Let's jump into

tech themes because this is, man, I've said this to so many people over the years 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 5th. And the reason for that is, like we've been discussing, 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. linkedin's is so powerful um 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 a commodity somebody will build something better it will come along but and linkedin is such the classic example like crap. Like, let's all be honest. Like the product is really bad at this point. Hasn't you have like 10 second page load time? Yeah. It's really, really bad, but like nobody will ever beat it. Like I will always use it. I'll use it every day because everybody I need

to 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 a couple things i'm thinking of are you know um 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 mere 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 AngelList.

Like it moves out from founders and VCs to employees. And then people are actually incentivized to keep their AngelList profile up to date. That proliferates to other industries. Design, there's a 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 of zero value until it is of critical mass value, and then it is of critical mass value and then it is of like completely defensible value um but uh but it's i really think it it would it would be a fool's errand to try and build a horizontal wide-based uh 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.

I think the era of horizontal platforms, once they have network effects applied, you don't disrupt them by building another horizontal platform. And I think 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 unseat it and disrupt LinkedIn. And like, yeah, we have our product qualms, but you're not going to do it by creating a better horizontal LinkedIn. Yep. And I think this plays, for me,

one point I want to bring up about the acquisition that plays really strongly in here is linkedin like they're smart guys right like uh and gals like they get this um 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 you know their api limits or your ability to um store data that you retrieve from linkedin that they have the most locked down quote-unquote open api yeah the api is a joke it is a utter joke um and so one of the things that gets me really excited about LinkedIn being part of Microsoft as a user, as a user of products, and as somebody who 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 LinkedIn. So long as they keep the network effect locked. So long as they keep the network effect, but it'll also be embedded into all of Microsoft's products, right? And Microsoft 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 um but if now all of a sudden you can like man think about all the cool products and services they're going to be enabled enabled by that you can um i'll just caveat this with like david remember venture capitalists are a niche market yeah exactly exactly um but uh uh there's so many more examples too yeah good point uh should we grade it um yeah no i think there was one oh i have a question i want to pose to you yep um so there it is in microsoft's interest to integrate LinkedIn with all of their products. Keep in mind, Microsoft also owns now the LinkedIn product and has an incentive to make that revenue stream profitable.

Which it is, without accounting for stock-based compensation. Yep. 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, it'll be interesting to see how they 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 Surface had. Or in a million other ways, Office and Windows always having tension. Do you run into a scenario here? Or is there a clear 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 um you know source of value for other products at microsoft i mean i gotta imagine i'll be really disappointed in microsoft and satya and kurt and everybody if if they take the the old school microsoft approach i can't see them doing that shots fired um but i mean like you know this is this is the whole thing about you know satya's leadership at microsoft is like the way that this company becomes relevant again and

and uh and an innovator again i mean somebody 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 every once in a while. Mobile. Mobile, yeah. But man, like, you know, Office on iPad, like I want to be everywhere where you are. And like, so if LinkedIn, all the value that they're going to hopefully go try and create 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 going to do this like this is um are we grading like right now the buy or are 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 um 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 going to 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. It's all going to come down to execution.

So right now, I'm going to give it an A- right now, just accounting for the huge amount of risk to come in execution. How are we both positive on this? I was going to give it an A. Like I woke up Monday morning 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 190 ish um i you know i don't think the company is actually worth less. And if you look at it, it's $25 billion.

Or what is it? They bought it for $26 billion. And it's a little over $3 billion in revenue. So like an 8x revenue. To acquire a sort of premier internet and sass 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 buy yeah so that's operating under the assumption that linkedin continued its trajectory um you have the the risk that typically comes with a startup acquisition

startup uh any m&a thing of of integration failing i can't really consider linkedin a startup no of integration failing and and you know there's um the bigger the acquisition the farther you can fall and a 26 billion dollar write-down would be truly like a gut punch. And I think 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. They're this cloud services company, and 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 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 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 sati's 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 and here's so here's something interesting that we

haven't talked about at all on this episode but 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. Maybe slightly less, but it's like on the same, you know, it's in the same ballpark. Because we haven't done WhatsApp yet. We haven't done WhatsApp yet. So, you know, is Microsoft buying LinkedIn worth, you know,

what do we got here? Pixar, Instagram, Twitch, Bungie, Siri, Lucasfilm, YouTube, Accompli, Rightly. That's a lot of money. 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've got to pull the trigger.

Yeah. Hats off for now at least to uh microsoft and uh and all our friends over there yeah and and to and to you know folks at linkedin i think the big question will be like can these cultures mash um you know are they gonna linkedin has offices all over the world but primarily centered in silicon valley microsoft typically doesn't do well with their silicon valley campuses but as we as kurt talked about a few months few months ago, they have a new mindset when it comes to M&A of like, yeah, we don't care where you are. You can be in Wunderlist here in Berlin. You can be a company. You can be in Silicon Valley. It doesn't matter.

Yeah. Just a lot of flights. Fortunately, they're close. Well, fortunately, Alaska bought Virgin. That's a great place to leave that. That's a great place to leave it. Do you want to do a quick carve out? Yeah, yeah. Mine's super quick because I think a lot of people probably will have seen it already. But the Code Conference was last week, and it was bookended by Elon 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 CodeConf. 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 the one where he says

there's like an 80% chance we're living in a computer simulation yeah but then there's other things where like the way that he explains why the um first stage 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 in position the ocean and for anybody that's sort of like into the spacex story understanding any of the physics behind that super approachable very interesting and clearly a visionary cool i i am i am grinning widely here because uh literally no joke was my my my carve out was was the bezos talk at the record 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. You know, he, man, that guy is just awesome. But a couple of quick things I love from it. You know, one, you know, they ask him like, what, you know, God, there's so much going on at Amazon. Like, how do you think about this? Like, how do you think about your businesses?

And he says, 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, you know, like Alexa or whatnot. Like, what about our customers isn't going to change, you know, over in the foreseeable future? Like, you know, so much is changing so fast in technology, but what are the like, core things that are not going to change? And also 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. So anyway, there we go. Code conference. It was good this year. Awesome. We want to thank our longtime friend of the show,

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Well, we're leaving you. I'll say it one more time because I think it's probably more useful at the end of the episode than the beginning. Would love it if you could leave us a review on iTunes. And if you liked it, show the episode with your friends. See ya. Who got the truth?

Is it you, is it you, is it you? Who got the truth now? friends. See ya.