LinkedIn deal could be a $26.2-bn time machine

Microsoft's blockbuster $26.2-billion takeover of LinkedIn might be an attempt to travel through time. Specifically, to the heady heights of yesteryear's technology valuations.

And if other beleaguered tech companies think that suitors will pay such handsome sums, more transactions may be coming down the pike.

How generous is Microsoft's takeover bid? It puts LinkedIn's enterprise value at 79 times the social network's earnings before interest, taxes, depreciation and amortisation, or Ebitda, for the 12 months that ended on March 31.

On the basis of that multiple, the transaction is more expensive than any big internet deal paid with cash, according to data compiled by Bloomberg. Microsoft is paying $220 for each of LinkedIn's monthly active users. By comparison, when Facebook acquired WhatsApp for $19 billion two years ago, it spent $40 for every user.

For LinkedIn, the attractions of the deal are obvious: Its shares fell nearly 42 per cent from the beginning of the year through last week, as investors expressed disappointment over a weak earnings forecast for 2016. Finding a buyer with deep pockets dulls the pain of being a publicly traded company.

Monday's deal wasn't the only richly valued technology takeover in recent days. On Sunday, Symantec said that it was buying Blue Coat, a provider of cybersecurity products, for $4.65 billion. That transaction valued Blue Coat at roughly 20 times its adjusted Ebitda and nearly 7.8 times its sales.

The question is whether other suitors will emerge with rich offers in hand. One perennial subject of deal rumours is another social network: Twitter. Shares of Twitter jumped nearly 7 per cent in trading on Monday, borne aloft by investors' hopes that the struggling tech company might finally receive a takeover offer. Twitter shares have fallen 64 per cent since the company went public in 2013, as the social network has struggled to show growth in the face of tough competition from the likes of Facebook and Snapchat.

Potential buyers for Twitter include Google and Facebook, analysts say, though they caution that Twitter's valuation may need to fall more before a suitor steps up.

At the price-to-sales multiple that Microsoft is paying for LinkedIn, roughly 7.2 times the social network's revenue for the last 12 months, Twitter would fetch roughly $18.7 billion - or nearly double its current market value of $10 billion.

Some are sceptical, though, that the combination of Microsoft and LinkedIn (at that price) makes sense. No one wants to consummate the last big deal before a sector collapses - as was the case in 2000 when Time Warner merged with AOL, a $165 billion internet deal that became a nightmare after the tech bubble burst. Microsoft's bet on LinkedIn - which less than five months ago was trading above the acquisition price of $196 a share - suggests that tech has more room to run, even as some bears are projecting that another bubble is bound to pop.

"Microsoft just paid on the assumption that we're going back to the multiples we had a year ago, but I don't think that's happening," said Max Wolff, chief economist at Manhattan Venture Partners.
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