Why Wunderlich Endorses Microsoft's LinkedIn Acquisition

Wunderlich Securities is positive on Microsoft Corporation MSFT's acquisition of LinkedIn Corp LNKD, saying that the embedding of LinkedIn products into MSFT's Office 365 and Dynamics CRM "could be transformative for the HCM (Human Capital Management) market in the next few years."

A Few Specifics

"Some may view the acquisition as expensive at 7.0x FY16E sales, but we came away with a more positive view. In our opinion, LNKD has proven that it is more than just a social network for professionals as the company has leveraged its 433+ million users to build a business in HCM with its recruiting and learning offerings," analyst Ryan MacDonald wrote in a note.

The acquisition would integrate LinkedIn Sales Navigator, LinkedIn Recruiting and Lynda.com with Microsoft's Office 365 and Dynamics CRM.

In addition, the Microsoft's $26.2 billion acquisition provides "access to LinkedIn's 433 million plus members in over 200 countries. Member growth is up 19 percent y/y with MAU's up 9 percent y/y to 105 million, driven by China, which is LinkedIn's fastest growing region."

Related Link: Pro: Microsoft-LinkedIn Merger Is A "Win-Win" Proposition

Further, LinkedIn generated FY15 revenue of $3.0 billion, up 35 percent from last year on 41 percent growth in talent solutions and a 101 percent growth in sponsored content.

'Real Opportunity'

"We believe there is a real opportunity for MSFT/LNKD to become a real competitor in HCM as LNKD already boasts 40k+ enterprise customers," MacDonald highlighted.

"While Microsoft expects the acquisition to be approximately 1 percent dilutive to non-GAAP EPS in FY17 and FY18, the acquisition should be accretive to non-GAAP EPS in FY19. In addition, MSFT still expects to generate $150 million of cost synergies annually by 2018. In terms of capital return, MSFT still expects to complete the remaining $10 billion share repurchase program on schedule."

Rating And Justification

However, the analyst reiterated its Hold rating and $55 price target on Microsoft, as the Windows software maker needs to clear regulatory hurdles and show it can successfully integrate LinkedIn into its platform given Microsoft's checkered history with large acquisitions."

Shares of Microsoft closed Monday's regular trading session $50.14, while LinkedIn closed at $192.21. Both stocks were relatively flat in Tuesday's pre-market session, with LinkedIn up 0.02 percent and Microsoft down less than a quarter of a percent at time of writing.