Microsoft’s recent acquisition of LinkedIn for a staggering $26.2 billion has sparked discussions about the valuation of the social media platform. While this may seem unrelated to smaller businesses, the underlying principles of strategic acquisitions hold true regardless of the deal size. By exploring the motivations behind strategic acquisitions, we can gain valuable insights into the factors that drive the value of a company, even in smaller-scale transactions.
The Financial vs. Strategic Buyer: A Distinction to Consider
When it comes to acquiring a business, there are two primary types of buyers: financial and strategic. Financial buyers are primarily interested in the future profitability of the target company. They aim to generate a return on their investment by selling more of the target company’s products or services. On the other hand, strategic buyers acquire a business for its inherent value within their own operations. They believe that incorporating the target company’s offerings will enhance their own sales and market position.
Examining Microsoft’s acquisition of LinkedIn, we can clearly see that it falls under the category of a strategic acquisition. Microsoft, a technology giant headquartered in Redmond, has been undergoing a significant transformation. Traditionally focused on operating systems, the company has shifted its attention towards cloud-based software applications. While Microsoft still enjoys a dominant market share in essential tools used by white-collar professionals, its position has been challenged by competitors in various product lines.
A case in point is Microsoft Office. Many businesses have turned to alternative offerings from Google and Apple, and others continue to use older versions of Microsoft Office despite the push towards the cloud-based Office 365.
LinkedIn presented an opportunity for Microsoft to tap into its vast pool of data and integrate it into their cloud-based software applications. Consider a scenario where a salesperson secures a crucial meeting with a new prospect. By entering the appointment as a Microsoft Outlook event, the salesperson gains access to comprehensive details about the prospect directly from their LinkedIn profile. This integration enables the salesperson to engage in informed small talk about the prospect’s educational background, previous job experiences, and current role—all without leaving Outlook.
Microsoft’s strategy hinges on the belief that such seamless integration across their platforms will entice users to upgrade to their latest software applications. Although your business may be considerably smaller than LinkedIn, the fundamental principle remains the same. In order to obtain the highest possible price for your business, it is crucial to understand that strategic acquisitions are driven by the acquirer’s desire to sell more of their own products or services.
The Value of Strategic Acquisitions: A Lesson for Smaller Businesses
Microsoft’s acquisition of LinkedIn offers an important lesson for businesses of all sizes. By recognizing the strategic value a target company can bring to the acquirer’s operations, you can better understand why seemingly astronomical acquisition prices may be justified. Just as a giant company acquires another giant to enhance its offerings, the same principle applies to smaller businesses. To maximize the value of your company, it is essential to position it strategically and align it with the goals of potential acquirers.
While not every business will have the opportunity to be acquired by a strategic buyer like Microsoft, the underlying concept remains relevant. By developing a unique value proposition and demonstrating how your products or services can contribute to an acquirer’s growth and market position, you increase the attractiveness of your business.
In conclusion, the acquisition of LinkedIn by Microsoft provides valuable insights into the dynamics of strategic acquisitions. By understanding the motivations behind such deals, you can better grasp the factors that influence the value of a company. Although the acquisition price may seem disproportionate, the strategic value and potential synergies can justify the investment. By positioning your business strategically and showcasing its value to potential acquirers, you can enhance its attractiveness and maximize its value in the eyes of strategic buyers.
