Microsoft’s LinkedIn buy is about CRM and HR, not social

But why did the team at Redmond do it, and what does it mean?

To answer the first question first – it’s very easy to scoff at Microsoft. The company is the type of corporate entity that cynics and self-styled creative or tech types (not all of them Apple Mac lovers either) love to scoff at: bloated, slow, perennially late to the party, and complacent. And having had a 'Marmite' CEO like Steve Ballmer didn’t help either.

Since Bill Gates stepped down Microsoft has made scores of mistakes: the Zune, the Kin, Windows Vista, Explorer 6, overpaying for Nokia and Skype…

Sometimes the company gets it right though and fundamentally, Microsoft is a decent company. It has a market cap of just under $400bn. It still has a huge R&D department and is more technically innovative than it’s given credit for; it has the Xbox gaming ecosystem; it makes great peripherals; there’s a lot that’s great about the Windows Mobile OS; and in the 'Enterprise' space, Microsoft is a key player. And it’s this last point that is the important one I think, and we’ll come back to it shortly.

Even a cursory look around the interwebs over the past 24 hours will show the cynics out in force. When a big firm with a reputation for blundering buys another firm that many people can’t see the point of, it’s like an ill-briefed politician appearing on Have I Got News For You. Last night and early this morning, the cynics were having great fun at Microsoft’s expense, and a lot of the comments out there were very funny.

Of course, Microsoft paid a premium for LinkedIn, as it seems to overpay for everything it acquires, but I think that this deal, should it get the nod from the regulatory authorities (the boards of buyer and seller have given their assent) is a good one for both parties.

First, let’s look at what Microsoft is buying. It is not buying an enterprise version of Facebook.

LinkedIn is usually described as 'a social network for business'. In a way it is, but it’s something else – it’s an eCRM (electronic customer relationship management) site as well.

Microsoft has been into CRM for a long time. To a creative at an ad agency, CRM might be dull, but it’s one of the things that oils the gears of 21st century business. For readers not familiar with the term, CRM refers to the practices, strategies and technology that companies use to manage and analyse customer interactions and data with the goal of improving business relationships with customers, retaining customers and driving sales growth by getting those customers to buy more. CRM could include a company's website, telephone, live chat, direct mail, marketing materials and social media; but these days an analysis of a customer’s electronic or online journey is becoming more important. CRM systems can also give a company detailed information on customers' personal information, purchase history, buying preferences and concerns – very valuable data in other words.

One of the interesting things about Microsoft since Satya Nadella took over from Ballmer as CEO in 2014, is that the company seems to be appraising what it’s good at – and more importantly, what it’s not so good at.

So, Xbox, peripherals like mice and keyboards and some phones aside, Microsoft doesn’t do hardware – and sexy consumer-facing hardware especially – very well. But it’s very good at software – especially the business stuff.

As well as the Office suite of products, and Windows of course, it’s very good at CRM – its Dynamics suite of CRM products is second only to Salesforce in the market. Interestingly, Microsoft had been sniffing round Salesforce in the past (last month it was rumoured to have had a $50bn offer rebuffed by Salesforce CEO Marc Benioff), but the latter was probably ultimately too big for even cash-rich Microsoft to buy.

Getting LinkedIn allows it to challenge Salesforce seriously for the first time, and other big CRM players like SAP and Oracle too. If, as most Redmond-watchers agree, Nadella’s Microsoft is focusing on more services for enterprise, then buying LinkedIn makes perfect sense.

There are the network’s 433 million users, for a start. In a way, this is the world’s biggest HR database. It needs a lot of improvement (the quality of job recommendations, especially for free users, isn’t great – I’ve lost count of the rubbish jobs I’ve been told I 'might be interested in' by LinkedIn), but the foundations are there. Microsoft could help make LinkedIn’s ads much more accurately targeted, and thus more effective, creating an attractive medium for advertisers, particularly employers looking for the very best candidates.

Secondly, it has a valuable e-learning tool in Lynda.com, which LinkedIn acquired a couple of years ago. Now, with Microsoft (which has a similar, but not as good product in the Microsoft Virtual Academy), one can see how Lynda might be employed to help sell Microsoft software products, and then provide assistance in learning to use them. In terms of a customer journey, or CRM, that’s pretty seamless.

Thirdly, there’s the social networking part. Not the most important aspect of the deal, but still of interest. Despite having a stake in Facebook, Microsoft has never done well in social networking. Now it has a social network of its own – and one that had first-mover advantage in its space to boot (in its space, LinkedIn is market leader, which makes it a better acquisition from, say, Nokia, which was one of just many mobile phone makers).

Fourth, there’s the data. We all know that these days, data is extremely valuable. LinkedIn is active in over 200 countries and has 105 million monthly active users (with, as we’ve already seen, 433 million registered overall).

The company also has – and this is deeply significant for a company like Microsoft, which has, to be frank, always struggled on mobile – 60 per cent of all traffic on mobile, and — thanks to some strong SEO — a staggering 45 billion quarterly page views.

It’s also one of the biggest repositories of job listings, with some seven million active listings currently.

Just think what Microsoft could do with this sort of data. Just for starters, it could make LinkedIn the default bio/identity service across its enterprise apps and services, including Office, Sharepoint, Skype and the rest. Why switch to, say, Facebook for Work when the software you already use at work has its own 'Facebook' built in, minus all the stuff about your private life? You could also create (and monetise?) an equivalent of Facebook’s news feed, but completely tailored your job or profession.

Of course, there is the nagging feeling that this might be another of Microsoft’s comically expensive acquisitions, along the lines of Nokia or Skype.

Microsoft paid around eight times sales for a company that’s no longer the growth juggernaut it once was. Then there is the fact that LinkedIn relies on companies hiring people for the vast majority of its money and it’s yet to go through a recession (it was a sub-$100 million revenue business in 2008).

LinkedIn doesn’t actually make money, with an annual loss last year; for $26bn, the acquirer should be getting something that either produces prodigious profits or has immeasurable strategic value. LinkedIn doesn’t immediately appear to have either.

And, the cynics say, LinkedIn is one of the most boring sites/companies out there, one that’s largely irrelevant to its hundreds of millions of users when they’re not actively job-hunting. In a way it is boring, but that’s not the point. Microsoft doesn’t have to be sexy. It just has to be good at what it does, and deliver dividends for shareholders.

This seems to be about Microsoft grabbing a much bigger slice of the (let’s admit it, boring to most people) HR and CRM space, not about it being Apple or Facebook.

Nadella said it himself in his media conference yesterday that that by buying LinkedIn's professional network: "It helps us differentiate our CRM product with social selling. It helps us take Dynamics into new spaces like human capital management with recruiting, and learning, and talent management."

He later told analysts that connecting LinkedIn data with Microsoft’s own Dynamics suite is "where the magic starts to happen".

It’s a little-known fact that, after Amazon, Microsoft is the world’s biggest cloud operator, and being able to put LinkedIn’s professional network in the cloud along with Office and Dynamics (and its other, and much smaller professional network, Yammer) makes perfect sense - especially when it can target its vast range of enterprise offerings to a potentially huge new user base.

That’s boring to most people. But to the enterprise this is much, much more exciting than the new Xbox consoles Microsoft also unveiled yesterday. Providing acquirer and acquired handle their relationship – and more importantly, their users – with care this could be the best bit of business Microsoft has done in years.

Barry Dudley is a partner at Green Square, corporate finance advisors to the media and marketing sector