
Bidding war with Salesforce drove up Microsoft’s LinkedIn bill - cm2187
https://next.ft.com/content/c741d6bc-3fdc-11e6-8716-a4a71e8140b0
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putlake
This pertinent HBR blog post is very interesting:
[https://hbr.org/2016/03/dont-use-round-numbers-in-a-
negotiat...](https://hbr.org/2016/03/dont-use-round-numbers-in-a-negotiation)

The TL;DR version is that acquisition offers in round numbers signal that the
buyer hasn't done proper due diligence. "Round initial offers were less likely
to secure a deal than precise offers. When they did, they ended up costing the
bidder more. All other things being equal, an acquisition launched with a bid
rounded to the $5 level had, on average, an $18 million larger price tag than
an acquisition launched with a more precise bid. The stock market reaction was
also 2% less (i.e., the bidder’s stock price jumped on average 2% less) for
bidders making round offers than for those making precise offers."

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brashrat
definitely interesting topic. Reading their analysis though, led me to believe
they didn't control for enough obvious variables.

Let me go through a scenario to give an example: how much was Nokia worth to
Microsoft? Their idea that "due diligence" would uncover a value, and MS
should signal the due diligence and the value with the pennies in the offer
price doesn't reflect the truth of the situation that nobody knew or could
know the value.

I'm not talking about a hindsight analysis after the Microsoft's mobile
strategy failed; let's say it had succeeded and Microsoft was now equal to
Android and iOS in a vicious 3 way competition: how much of that value would
you attribute to the parts that came from Nokia? How much of the value would
be due to MS's software? whose marketing muscle was it? Since it would now be
a threeway competition, profits would be thinner, how much of that could be
predicted with "due diligence"?

You don't know, because nobody knows; these types of intangibles are on the
balance sheet as Goodwill because it's not possible to put a value on them
except immediately post facto an acquisition. Due diligence is to uncover that
what they are selling is what you think you buying, not the value you think
you can extract from it in combination with your own assets, that's a secret
you keep.

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putlake
You're right; there are many unknowns. But that doesn't mean you pull a number
out of thin air. M&A teams use all kinds of models to make financial
projections and calculate ranges for valuation. Even for the LinkedIn
acquisition, other bidders backed away because per their calculations, the
deal was getting too pricey.

The rounding thing I think is only a signal. When you get a rounded offer, you
feel that the buyer has room to go up. When you get a precise offer, the
signal is the buyer has an exact notion of how much this is worth to them, so
they might not be willing to go much higher than their initial offer. It's a
psychological thing which will probably have a smaller effect in a bidding
war.

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Joeri
So, if i understand this correctly, microsoft paid too much for linkedin
because they didn't want anyone else to buy it, but now they have to recoup
the purchase cost and they'll do that by making cuts at linkedin?

Wat?

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joshdickson
Well, a key aspect of this, and part of why LinkedIn wanted to sell itself to
Microsoft, was that Nadella/Microsoft will allow LinkedIn to operate
independently within Microsoft under Jeff Weiner. Microsoft didn't pay "too
much," it's just that for the price that they paid, they want to see LinkedIn
reduce costs. You have to remember that LinkedIn, despite an earnings report
that would make you think otherwise, loses money on a GAAP basis. So Microsoft
was fine with paying more as long as they could reduce some of that burn
moving forward. That is not an indication that the deal was too expensive in
aggregate, it's just how Microsoft thinks about its cash position moving
forward.

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BurningFrog
> for the price that they paid, they want to see LinkedIn reduce costs

I'd expect Microsoft to want LinkedIn to maximize profits.

In that equation, the sunk cost of the acquisition should not be a factor.

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nl
I'd expect Microsoft to want LinkedIn to drive users into the MS enterprises
ecosystem, not maximise profit on its own.

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jaytaylor
For the non-paywalled version click this [0] link (or the "web" link at the
top of this page) then click the top search result.

[0]
[https://www.google.com/search?q=Bidding%20war%20%5Bwith%20Sa...](https://www.google.com/search?q=Bidding%20war%20%5Bwith%20Salesforce%5D%20drove%20up%20Microsoft%E2%80%99s%20LinkedIn%20bill)

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wiseleo
[http://venturebeat.com/2016/07/01/salesforce-lost-the-
biddin...](http://venturebeat.com/2016/07/01/salesforce-lost-the-bidding-war-
for-linkedin-but-forced-microsoft-to-pay-an-extra-4-7-billion/) has details
and filing.

