ANALYSIS: Sheffield Hallam University academics look at the £18bn marriage of Microsoft and LinkedIn

The announcement yesterday that Microsoft is buying the professional networking website LinkedIn was big news in the business world.

Microsoft has been involved in a number of high value acquisitions in recent years but the amount paid for LinkedIn, £18billion, is a staggering amount of money, which eclipses their previous purchases.

What’s also interesting is the premium they paid for the company. At $196 per share that’s a 50 per cent premium on the closing share price on Friday.

Although this is not unusual in the current mergers and acquisitions market, as other high profile buyouts in recent times have demonstrated, it will place a number of demands on Microsoft to warrant that value.

Either significant cost savings or revenue growth must be achieved. The more risky of these two options is a plan based on high revenue growth.

Judging by changes in the share price of LinkedIn and Microsoft, the market as a whole believes the deal will be done at the price offered, although this is subject to approval by regulators in the US, EU, Canada and Brazil.

The market also appears fairly sanguine about Microsoft making the purchase given the very modest fall in their share price - 2.6 per cent, which brings their decline this year to 10 per cent.

Since the majority of acquisitions destroy value for acquiring firm shareholders, research evidence is that the odds are not in favour of Microsoft adding value with the LinkedIn purchase.

According to Bloomberg, the price paid by Microsoft equates to an eye watering 91 times earnings before interest, taxes, depreciation and amortization (EBITDA).

But, this is about more than money for Microsoft; this is about branding and market positioning which is demonstrated by their other high profile purchases of Skype and Nokia’s mobile phone business.

The expected growth and development of LinkedIn depend on Microsoft’s ability to successfully integrate the operations, product line and technology of LinkedIn.

Research indicates that integration process is one of the most challenging aspects of acquisition strategy.

The challenges may include potential difficulties in employee retention in LinkedIn, and managing organisational cultural differences between LinkedIn and Microsoft.

Given that LinkedIn will continue to operate as an independent business, and that the LinkedIn’s CEO will be remaining in post, reporting to Microsoft CEO Satya Nadella, it will be interesting to see how deeply the integration occurs.

The most critical year for Microsoft shareholders will be the second year following acquisition; if it is not working the shareholders must expect a significant fall in the price of their shares, and a change in CEO.

Therefore, the success of the deal depends whether Microsoft manages the integration process effectively.