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News analysis

Microsoft CEO has head in the cloud with LinkedIn buy

WASHINGTON • Microsoft's US$26.2 billion (S$35.5 billion) purchase of LinkedIn is the most expensive move so far in chief executive officer Satya Nadella's push to remake the company for a future when most business computing happens over the Internet.

Yet LinkedIn would increase Microsoft's annual sales by just 3 per cent and there are no immediate plans for integration.

LinkedIn will at least initially operate largely independently. That's asking investors to trust that Mr Nadella has the right vision for the future - and that he will do a better job than his predecessors of handling acquisitions.

Personal computers are waning, and Microsoft's traditional desktop software business has suffered. Mr Nadella is trying to tilt the company towards selling software and services over the Internet, and the LinkedIn deal is a way to accelerate that shift.

Microsoft's two biggest cloud businesses are Azure, which rents computing to companies, and the Office 365 cloud versions of e-mail, collaboration software, word- processing and spreadsheet software.

"I see it as a land grab," said Mr Sid Parakh, a fund manager for Becker Capital Management in Portland. "Cloud applications are where the money should be and there are few cloud assets that operate at scale. Execution is the key."

CEO Satya Nadella is trying to tilt Microsoft towards selling software and services over the Internet, and the LinkedIn deal is a way to accelerate that shift.

Mr Nadella said yesterday on a conference call: "LinkedIn essentially becomes the social fabric across all of Microsoft."

He cited a few examples of how LinkedIn might work with Microsoft products. He sees LinkedIn profiles being connected to contacts contained in Outlook, Skype and others. Cortana, Microsoft's digital assistant, might wake up when you're on the way to a meeting and tell you about the people who you're going to encounter for the first time, based on professional network information from LinkedIn.

While Microsoft's cloud revenue is surging - Azure product sales have risen more than 100 per cent quarterly - the total business contributed just US$5.8 billion of Microsoft's US$93.6 billion in sales in the last fiscal year. Mr Nadella has said annualised sales from commercial cloud products will reach US$20 billion in fiscal 2018, and LinkedIn will be a key component of that.

"Cloud adoption is still moving forward but it hasn't fully hit yet," said Ms Shannon Cross, an analyst at Cross Research. "What you're seeing right now is Microsoft building a lot of assets and investing very heavily in the cloud with the expectation that, in a few years, people are going to look around and say, 'Wow, look at what they've built and it's very hard to replicate.'"

Mr Nadella will have to improve Microsoft's post-purchase record: In almost every case, the acquired company has produced lacklustre results for the software maker. Microsoft has written off most of its US$9.5 billion acquisition of handset maker Nokia. Its 2011 purchase of Internet phone service Skype hasn't fulfilled many of the company's promises of integrating with its other services.

Yammer, a social network for businesses that it acquired for US$1.2 billion in 2012, has had mixed results. The 2012 writedown of Internet advertising company aQuantive saw Microsoft's US$6.3 billion purchase in 2007 practically evaporate.

By saying LinkedIn will remain a stand-alone company, Mr Nadella is manoeuvring to try to prevent the kind of talent exit that may leach the value out of his acquisition.

Mr Parakh said the real test of whether Mr Nadella's big buy has paid off won't come for a couple of years. "Probably a year or two after closing, people are going to be curious about what kind of products have you built with LinkedIn that you couldn't have without it?" he said.

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A version of this article appeared in the print edition of The Straits Times on June 15, 2016, with the headline 'Microsoft CEO has head in the cloud with LinkedIn buy'. Print Edition | Subscribe