How Did LinkedIn’s Growth and Earnings Quality Look before Deal?

Microsoft (MSFT) announced the acquisition of LinkedIn (LNKD) for $26.2 billion in cash on June 13, 2016. In the company’s largest acquisition to date, Microsoft agreed to pay $196 for every LinkedIn share, which reflected a premium of roughly 50% over its closing price on June 10, 2016. The deal, subject to regulatory approval, is expected to benefit Microsoft in a number of ways. However, this series will focus on how the deal is beneficial to LinkedIn.

Prior to the deal announcement, LinkedIn’s share price plummeted 42% in 2016 as can be seen in the chart below. A declining revenue growth rate, a weak outlook, and slow growth in unique visiting members to its platform took a toll on its share price. Moreover, the company’s business segments like the Talent and Marketing solutions have their own challenges, which we’ll discuss in a later part of the series.

LinkedIn continues to report negative earnings on a GAAP (generally accepted accounting principles) basis, primarily reflecting excessive stock-based compensation, which is expected to be ~$580 million in 2016. Last year, the company paid ~$510 million as stock-based compensation, which amounts to ~96% of operating income or about 16% of the company’s revenue. Other companies like Google (GOOG), Amazon (AMZN), and Facebook (FB) pay approximately 15% of operating income, or 10% of revenues, as stock-based compensation.

Most analysts agree that the higher a company’s dependence on stock-based compensation, the lower the quality of its earnings. Thus, being acquired appears to be the best deal for LinkedIn.

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