Acquired - LinkedIn

0:00You are not yet schooled in the power of network effects young Gilbert. We'll cut that Welcome to episode 14 of acquired the podcast where we talk about technology acquisitions that actually went well I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. We have a very special episode for you today. I can't really think of a time when I didn't call it a very special episode. Every episode is special then. It's true. This episode is not necessarily about a technology acquisition that actually went well. We have no idea how it went. It is huge and it is recent. Today we are talking about LinkedIn being acquired by Microsoft two days ago.

0:58at the time of recording and super speculative, but I think the whole internet is sort of a buzz with, you know, what's the deal with this acquisition? Why did they do it? You know, what's the future hold? And I think it's going to be super interesting to speculate a little bit and throw out some possible paths and draw some conclusions. Yeah, we're going to have some fun with this. I don't think we've ever gotten as many requests on Slack. No. Email and other channels for... No.

1:27please talk about LinkedIn. So here we are. And in fact, I think this may change the timbre of what this show is about. I think for the, you know, at some point here, we might rename this to just a show about tech acquisitions because we're doing things that didn't go well, things that didn't go well. Really anything has got a good story. So we love stories here. We do. All right, listeners.

1:53Now is a great time to talk about a new partner of ours here on Acquired. Lagora, the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

2:21So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love like tabular review where you.

2:40drop in a folder of hundreds of contracts, and it pulls every key term into a grid a lawyer can actually work with. Lugora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

3:00And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1200 legal teams in 50 countries, and crazily they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

3:52Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you.

4:14A little bit of administrative before we dive in. As usual, I'm going to ask please review us on iTunes. It makes a huge difference and it's what makes the show grow and tick. Share it on Twitter, Facebook, or even LinkedIn. Please share it on Microsoft LinkedIn whenever you can.

4:32For those of you who we're at we get some questions. You know, I don't have I'm not listening on iTunes or I don't have an Apple device We're going to post this on product on so search for it on product on we would love loving up both there. Yes, please. Thank you as always and and feel free to join the Slack group. It's really it's really awesome interacting with all you guys We've got over a hundred people now and yeah great discussion going on so if you want to if you want to spend more time with Ben and David join the Slack group. Yeah We want to do a little bit of follow-up. There's been some news from our last couple episodes that we think are worth talking about for a minute here. David, let's talk about Snapchat. Yeah, we're going to add a, sometimes we'll have this, sometimes we won't, but adding a section to the show on follow-ups on previous shows. So we'll do this quickly. But first, from Snapchat, big announcement this week as well.

5:26Ben Thompson, our favorite Oracle here on Acquired tweeted that the LinkedIn acquisition and WWDC were the second and third most important announcements of the week. And that Snapchat launching their advertising API was the most important announcement of the week. We'll time we'll tell on that.

5:49Yeah, I think all we have right now is a press release to go off of and it'll be super interesting to see how advertisers and brands adopt that. Yeah, big profile in ad week, though. Talking about the launch of this API and profiling the company. We're reading, willing to it in the show notes. And then the second follow up we wanted to do is actually on instant articles as well. Ben had a fun experience this week. Yeah, I don't actually not sure if this is an announced product or even maybe just like a relabel of an existing one, but I tapped on what looked like a Facebook instant oracle this week and expanded into a native ad unit. And it was something that was a super sleek experience to just, it had my email auto filled, my phone number auto filled, and it was a way for me to kind of join a waiting list for an upcoming product. And I think Facebook has always had this direct response capture type ad unit, but it's really interesting to see them potentially expanding that.

6:46That instant articles or instant ads of brela to include these other things and having a real sleek experience with it Yeah, and it cool with both of these that you know the ad products and ad product teams don't get a lot of airtime in tech with companies, but especially you know social networks and tech companies, but Really cool product innovations on on both of these fronts. Yeah, yeah Cool. All right. With that, let's dive in. Let's dive in. Acquisition, history, and facts. So LinkedIn, I assume almost everybody listening to this episode is a member of LinkedIn, but let's go back to when it was started. If not, I'd like to invite you to join my professional network on LinkedIn. Spam your address books. We'll get to that. Okay. So LinkedIn, I think I could be wrong in this, but I think was the very first

7:42not spin out, but progeny of the PayPal mafia. 2003? 2002. So PayPal was acquired, as we talked about several times ago, was acquired by eBay in July of 2002, and in December, December 14th of 2002, to be exact, less than six months later.

8:07Several former paypalers led by Reid Hoffman band together and they form a new company and they call it LinkedIn and they So they start in December and then they work really quickly and they launched an launch an MVP very quickly especially again. This is like pre-AWS time They launched an MVP in May of 2003 and it is a social network and social networks are hot then the Yeah, I think I remember reading the Facebook effect by David Kirkpatrick and in that book He kind of talks about that there was a group of people that were in Silicon Valley that were super involved in a lot of tech products and realized that social networking was gonna be the next big thing and that you know, this was totally under it it explains their fast time to market because I think that

9:01You know with with friends to write a word that that's what I was gonna say there's a group of x-pay parlors and other kind of close people that were like, you know technologies finally in the right place right now where this is about to be huge and let's let's get to it Yeah, and it's it's really cool that like there was this in Silicon Valley this kind of like swelling of interest and building of social networks. Facebook hadn't even been started yet. But Friendster was a super hot company. They had raised money from Benchmark and somebody else, I can't remember, but we're darling of Silicon Valley. My space was growing quickly. And Reed Hoffman and Mark Pinkis both put money into Friendster, if I recall. I think that's right. I think that's right.

9:51Yeah. Anyway, so they launched in May of 2003 and they have a really interesting sort of bootstrapping mechanic for the network to get, you know, how do you start a network from a cold start? And that was the infamous and...

10:11Product of a lawsuit later on as is a recurring theme on our show the infamous scrape your address book and spam all of your all of your Everybody in your email address book. Yeah, and in a very funny kind of super foreshadowing or foreshadow-esque way Kind of reminds me of Microsoft. I mean they did this thing that was You know sort of sneaky and maybe would earn them a lawsuit And they sort of just did it knowing that the upside from doing this thing, you know, it would it would be huge. And it would be something where they would have to pay the price later. They got sued. I think it was a hundred million dollars suit later on for for this. But, um, you know, once they had the network, right? And you would have network, you know, and it's this is like a total recurring theme in network driven technology companies like, you know,

11:06doesn't get talked a little lot about these days but it's on the internet like Airbnb totally did this you know off of Craigslist to bootstrap their supply networks to start and many many other networks have done the same thing. And do you know about Microsoft's like price per core thing? We were talked about this on the show. I don't like that price per CPU. They basically put it when they were originally selling windows or maybe DOS really early on they were they had it in their sales contracts that They would make money for one copy of Windows per core shipped by someone who entered an agreement with Microsoft to sell Windows at all. So they basically squash the competition because manufacturers realized, oh, well, I'm paying for a copy of Windows, whether I put it on here or not. So I may as well ship Windows. And by the time, you know, they got sued for that and they, I think actually the Justice Department forced them to pull that out of their contracts.

12:02Um, by the time that came around, they, you know, had already, you just watched the competition and we're totally way out ahead. It's totally, you know, when you're facing a cold star problem as a network, you know, the chicken and egg problem, like.

12:15You can't, you know, you got to have something to some unfair advantage to get through it. It doesn't always have to be illegal, but in many cases it turns out it was. So late, by late 2003, the network is starting to take off a little bit. It's still really early.

12:34They raised a series A from Sequoia, $4.7 million, which was a lot of money that day, especially after the internet bubble had burst. And Mark Kwame joins the board. Later when he left Sequoia, Mike Moritz takes over and is still to this day, I believe, on the board of LinkedIn. And Mark Kwame is now in Columbus, Ohio, around drive capital. Exactly. Ben's hometown. Climb the shout out. Shout out.

13:03And so things continue to go well. And in 2004, the next year they raised their Series B from Greylock. And super cool. About two, I think about two years ago, much like when we talked about with YouTube and through the lawsuit of YouTube, we were able to see Sequoia's investment memo about that. Two years ago, Reid Hoffman open source to quote unquote his pitch deck for for his series be a great like it's great document will link will link to it in the show notes but he has the whole slightly edited pitch deck that he used for linkedin series B and then he has commentary on it and and he's like very self critical you know it's like this was you know obviously this worked but like made a bunch of mistakes and like I was really nervous about these things and trying to cover up like we had no revenue everybody was like the elephant in the room was like by the heck do you guys not have revenue

13:56And I was really nervous about that. Cool document. So in the pitch deck, you know, he kind of the LinkedIn positions, they position it as like the... the unbiased sort of ground source of truth about professionals and talk about how with all the existing ways of finding professionals in the world at that time was mostly kind of directory-based and all these incentive problems and people were incentivized to make themselves.

14:29look good or to be founded to do sales leads and there was nothing and they thought that a network could solve all of these incentive problems and create true, for the first time true information publicly available on the internet about professionals and where they are and how to find them and turns out they were right. As we talk about this acquisition, LinkedIn has never been primarily an advertising based network. They've advertising based business. They've had ads as part of their business line but most of their revenue comes from monetizing recruiters.

15:09Um, and so as people have been commenting about this acquisition, you hear lots of talk about like, oh, LinkedIn doesn't have a lot of engaged users and I spend no time on the site and it looks like crap. Um, but you can't really judge this company in the same way that you judge Facebook or Twitter because it's not how they monetize. No, and Josh element has a great post that I'll put in the show notes too. Josh is a, uh, he was at LinkedIn. Um, he's been in a bunch of great companies and he's at great lock now. And he has a great post talking about, you know, you can't look at this like are the users of LinkedIn really like X multiple more valuable? They're not that engaged. I mean, at the end of the day, they are able to monetize those users in a very different way.

15:53because they sell an extremely high-value product, which is browsing access to these people. Yep. And it's interesting later what we'll get in a minute to LinkedIn's IPO, but actually in the IPO prospectus, they list in the risk factors, quote, a substantial majority of members do not visit the website on a monthly basis.

16:15which is funny when you compare them to many of the other businesses that we've looked at on this show. But again, they don't make money when you visit the website. They make money from having your data up-to-date professional data about you on the system and you being found. So they build these business lines over time, but they're three that LinkedIn has. And the first is what they call talent solutions. And that's about 60% of their revenue. And that is for recruiters.

16:43And it's super, as Ben was talking about, and this is a super expensive product that they sell to recruiters. The full product is $900 a month per seat. And I think the cheapest way to go to LinkedIn premium is like $600 a year. It's $100 a month. About $1200 a year. Yeah.

17:03So think about that every time somebody contacts you and has the little yellow in thing there But as like you know, they've completely they've just knocked it out of the park and executing on this like if you are a recruiter operating in the HR world today you need to have you know linked in recruiter like it's just there's It's like a joke if you don't right right and and You know you like let's imagine that you're a company and you haven't purchased this for your recruiting department you're not going to be able to hire any recruiters because they're, you know, they're going to be hamstrung from day one. Yeah. So they've created this just incredible expectation in the market that that is a table's table stakes tool to have. Table stakes. And they've captured a ton of value in that market. So then the other two business lines, they have, the other, the second one they call marketing solutions. And that is primarily ads that they show in various forms on the site, whether it's sponsored in mail or

18:00all sorts of things. And then the third one is premium subscription. So this is what they've spent a lot of time on over the last few years. And that's monetizing, monetizing members of LinkedIn who are not recruiters. Oh, so you're separating. So LinkedIn premium is separate from their recruiting tools. Yes. And LinkedIn premium, there are different flavors of it, but gives you access to broaden out beyond your second degree network on LinkedIn. And that's great.

18:30I mean, I use it all the time. Basically, this tool was meant for venture capitalists, I think, and business development folks and sales folks. And that's about 20% of their revenue too. And that's about three billion a year in revenue, I think. Total? Yeah. Yeah. I think that I actually did not look that up. Yeah. I think that's about right. And that's about 106 million users.

18:58106 million active users, just about 400 million registered users on the site. Interesting. Which is very interesting. So they continue, they execute super well on this as a private company and the sort of biggest event that they have before they go public is in 2000.

19:21I believe it was 2007. Yup. Read actually steps aside as CEO. And they bring in an outside CEO to run the company. Read stays at the company day to day. I got named Dan Nye. So this isn't actually talked about. He didn't stay very long. He was there less than two years. Came from Intuit and then he was at Advent Software. He went on to become CEO of Rocket Lawyer.

19:47Which reminds me a total I found this doing research for the show on a side but really kind of hilarious When they raised their series C which they did in January of 2007 right before this happens They raised Bessimer let it but they also had this other firm that I hadn't heard of in there called the European Founders Fund I was like what's the European Founders Fund and I looked it up and it's the Samvar Brothers Wait, we've talked about them before, right? These are the guys that run Rocket Internet. Rocket lawyer made me think of it in Europe that you just copycat all the US businesses and it was like this is just too funny. The Sandbar Brothers had a venture capital firm. I don't know if it still exists called European Founders Fund. So there's just copying Founders Fund. Just like they do with many other businesses. Man, it works for them.

20:42So I just saw that and I was like, that is too funny. So Dan doesn't last very long as CEO, but in December of 2008, they bring in Jeff Wiener and he is still today at the CEO of LinkedIn. And so- And even will be inside Microsoft? Exactly. Yeah, and they will remain so within Microsoft.

21:07January of 2011, the company finally filed files for an IPO. They go public in May of 2011. They priced the IPO at $45 a share. It trades up to $94.25 by the end of the first day of trading. And this was like, I remember, this was like a watershed moment at the time. They were the first sort of...

21:32New wave internet company big internet company to go public after the sort of mid-2000s and it was shortly thereafter that Facebook went public That Pandora went public that Twitter went public So this was a this was a big moment and that everybody kind of realized that these social networks that you know were still You know, people were like, how does Facebook make money? Even though Facebook makes money in a very different fashion from LinkedIn. But when they, when LinkedIn, you know, filed their perspectives for the IPO, people are like, man, this business is going to do like 50 million in EBITDA this year. So it was, it was a big moment. And, and so, and then the stock continued to do really well for over the five-ish years that it was public up and going up into the, you know,

22:23200s and and above until what February of this year until until February 5th 2016 just a few months ago was on a Friday both LinkedIn and Tableau announced 4th quarter 2015 results and and expectations for the year to Wall Street and it was like it was like Black Friday for software companies. Yeah, and it actually it killed the the private company valuation in some of the market cap of other SaaS companies. And it felt like it was super sensationalized and not well understood by the market. Because LinkedIn. So LinkedIn announced earnings. They actually beat expectations on earnings for the fourth quarter of 2015. But they announced.

23:12lower than guidance that was lower than Wall Street expected for 2016 and the stock got hammered. It was down 43.6% in a single day. $10 billion market cap just wiped out of LinkedIn. Yeah, I mean, they basically were signaling that we're hitting the top of our S curve and that you can't count on this continued growth in the future, which had been priced into their stock. And so I think while that core business was still strong, They were looking for secondary revenue channels with they had a display ads business that they had shut down a little bit earlier, or at least moved resources away from. And then there was a second product, through what that was called, that was, it was a lead sales navigator. Well sales navigator, they still have. I'm working on but the growth, they expected huge growth in sales navigator and it's been slower to materialize. We'll get into this.

24:09But at one point, LinkedIn had a market cap of over $50 billion. And between that and then following was just a fell off a cliff in terms of the stock price. On that same day, similar thing happened to Tableau, which is a great software company here in Seattle. And because of those two...

24:37those two companies announcing weaker than expected earnings, the whole SaaS sector, public SaaS companies, just took a big hit. So on the same day, on Friday, New Relic down 23%, Zendesk down 20%, HubSpot down 20%, Workday down 16%, NetSuite 15, Click 14, Demandware, which ends up getting acquired by Salesforce last week, two weeks ago. It's down 13% Salesforce, itself was down 13%, it was just carnage.

25:07Yeah, also nice research. Thank you Internet. And so then for the last couple months the share price of LinkedIn has crept back up but nowhere near the highs where it once was and then two days ago Monday in like what was.

25:29gotta be one of the best kept secrets of major M&A of all time. Microsoft announces that they are acquiring the company for $196 per share, which comes to $26.2 billion total, which is a lot of money but half of what LinkedIn was worth a year ago. The thing that I wasn't thinking about in February when It's like there's two parts to Arriving at this conclusion and I feel like within that first week I sort of understood like oh these companies are sort of undervalued right now because they took this huge hit and You know, they're their core business remained strong It was just that a new business that proposed that promised huge growth didn't quite materialize like they're still doing three billion in revenue a year and the thing that didn't occur to me at that time is Okay, these guys are on sale and that doesn't mean on sale just to go buy the stock

26:26That means they're massively at a discount for somebody to acquire them. And what you got to start thinking then is who are key acquirers where LinkedIn could be a massive asset and amplified by their existing business. So our job today is to speculate and think about was this good? Was this a good move for Microsoft for LinkedIn?

26:48shareholders will will find out but i i feel like we can't we can't dive into it just yet without mentioning a super important piece of context here which is that about a year ago a little over a year ago there were tons of rumors swirling in the market that microsoft was had made an offer to acquire sales force yeah i think i think it was all but confirmed like that that that was actually you know that came to the 11th hour and then fell through. So the rumors, and these are just rumors we won't know. Maybe we can do a show on this at some point, but that would be fun. The rumors were that Microsoft offered somewhere between 50 and $55 billion to acquire Salesforce a little over a year ago. And Salesforce was willing to talk, but they wanted 70 and Microsoft walked away from that. So super important. And that played out in the press over weeks.

27:42and that two things with this, both of this was completely kept quiet. The L.O.I. I think was signed a month ago. Yeah. And Jeff Weiner and his memo to LinkedIn employees mentions that the senior management team at LinkedIn has had, quote, months to digest this, which is pretty amazing. And apparently it all started after February 5th. Which says to me at Microsoft that not a lot of people knew.

28:06I mean, this was something that was board, Satya, key executives. Actually, friend of the show Kurt Delbeni is very much involved in orchestrating how these two companies will come together. Kurt, who we were lucky enough to have on for our Accompli and Wonderless episode is going to be leading the integration for Microsoft. Yeah. Actually, the press release talks about how he's going to be doing that with...

28:32Scott Guthrie, who leads Enterprise, which includes both Azure and Dynamics CRM product. And Chi Lu, which Chi's purview is mostly productivity, so the whole office suite and Bing. And so I think there's a little bit of clue there as to what they're going to do with it, probably in office and then some combination of Azure and fueling the Dynamics product. Yeah. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta.

29:01AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would not, and you're done. But in an AI first world, that doesn't hold up anymore. Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit.

29:27Vanta's own research found that around 70% of companies have this quote-unquote shadow AI running with no security review at all. Right. And that's where Vanta comes in. They're the leading-agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta agent. Think of it as a GRC engineer, that's governance, risk, and compliance, except that it's software and it doesn't sleep. It finds the issues drafts the fixes and cuts the time that you'd spend on vendor assessments in half. In half!

29:58which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment. And that's the real value.

30:17Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get a thousand dollars off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for a thousand dollars off and just tell them that Ben and David sent you. Well, let's jump into acquisition categories. I feel like this will start to unpack this here. What's your early categorization here? Yeah, so I mean, I think there's a business line from acquiring the current revenue stream. But in my mind, you don't buy this product just to cash flow it. They're not buying that business line because it's going to pay itself back.

31:13you know, short order and we feel good about owning this new revenue stream. It's an integration place. So I'm calling this a product acquisition since it's a product that they're going to amplify the current sales of with their own kind of channel and integrations and then make their own products better and kind of define the future of identity. So I would say it's a product acquisition to be combined with their existing products. Yeah, I am going to take a similar route.

31:42But I think this is really key. So for me, I said, yes, product acquisition. But it's a product acquisition that at least has the potential, I think, to transform and evolve an entire business line for Microsoft. So clearly this is, I don't know, but I would imagine this is going to be within Microsoft's business process, productivity and business processes segment, which is one of the new segments that Satya streamlined the company into when he took over.

32:12And I think there's so many ways angles to think about LinkedIn. But one of them that you have to imagine people at Microsoft are thinking about is as a data set and a data acquisition and the ability to both operate, continue to operate LinkedIn as the set of products that it is within that segment. But then infuse that data into office, into active directory, into dynamics, into All of the mobile first, cloud first world that Microsoft lives in now, all of the business tools that they have, you have to imagine it's something they're thinking about. Yeah, totally. That's a really good lead in. I have four buckets of why I think they pulled the trigger on this one. That first one you just nailed is integration with Office 365 to extend identity outside the company.

33:09in the world of Microsoft of your, they have active directory. Which we might want to say I'm worried about that because I bet a lot of our listeners have no idea what active directory is.

33:21So basically Microsoft's lock in and the enterprise comes from the fact that they own identity and everything that stems from that So everything works seamlessly with with their you know, or historically works seamlessly across all their products because everything is is you know plugs into exchange and uses active directory to manage identity and it's it's you know the rock solid truth of who you are that everything in the company can plug into. So when you as an employee at a company that uses the Microsoft productivity suite.

33:52you sign in to your Microsoft account and then that grants you access to your email to Office 365, to whatever enterprise that if you use- In fact even Windows, for the few people out there who use Dynamics, you know, into Dynamics, and even Windows, yep. You can think of it as like deeply, deeply integrated single sign on. And the nature of companies has changed and I think that we'll talk about trends in a little bit but I think that big tech trend or really a big like world trend that's happened is people move around a lot I mean people stay at companies for 18 to 30 months and there's a lot of bouncing around and people collect knowledge from all the different companies they were at and build a reputation from all the different companies that they were at and a world that is entirely centered around you know who you are at this company is

34:47Kind of antiquated. Yeah, this is such a good point company the company doesn't own your identity anymore You own your identity and you lend your skills and reputation to the company while you're there and some people do that for a really long time But some people don't and you have to have a way to be able to access and leverage all that other data. Yep, and You know for Microsoft previously, which is again trying to reinvent everything it's doing as Kurt talked to us about a few months ago, you know in this you know Mobile first cloud first world like when the reality is that the majority of employees at least in fields like tech or finance You know aren't staying in the same job for a long periods time anymore if you as Microsoft only have these very siloed views into people and not the their holistic view of their skills and their career history and their identity, you know across jobs, you know

35:43There we go, hence LinkedIn. Yeah, and the parallel, I think I should, but that I wrote down anyways, you know, five years ago, ten years ago, we had this like IT shake up where they're freaking out about BYOD, bring your own device. And this is the realization of BYOD when it comes to identity. Yeah. BYOD, bring your own employee. BYOP, your own person. Yeah. And you mentioned...

36:09Well, I was going to go into the sort of second things. I think there's a good segue there. The second reason, we kind of talked about identity in Office 365 there. I think that as it extends to dynamic CRM, it's hugely valuable to know an entire person's work history when you are trying to sell something to them. So imagining the problem with Microsoft's world view before is this is John Smith and he was at company A. There is also a John Smith at company B.

36:39We don't know if those are related and you know, I'm sure there's like attempts to make sure they're related, but the magical thing that LinkedIn nailed is all the incentives are aligned for them to make money off of you Wanting to make all of your information accurate and so if you can have this like holistic view of identity when it comes to customers That's incredibly valuable also. Yep, the I agree and I want to jump into with something I've been thinking about is with regards to this acquisition and Ben and I were texting about this earlier. The way I think about LinkedIn is like it's such a canonical example of like the power of a network effect and the value of the asset of LinkedIn's network that they've built and I'll get into this in a little bit in tech themes. But if you take for a given for the moment that the

37:34The network effect and the the defensibility of that means that their professional network that they built basically can never almost never be disrupted and Lord knows many people have tried over the years despite the products being really crappy and all these other things. What can you build on top of that and we talked about how LinkedIn isn't.

37:53doesn't monetize via ads really. You know, they're sort of like, they did recruiting first. That was the most obvious. They nailed it. Like they own that industry. But then it's also really obvious. Like they should do like sales and visit them and partnerships and like, you know, like what I used LinkedIn for. And probably many, many of our listeners and they kind of really dropped the ball there. And then you think about like, man, could Microsoft with the LinkedIn network asset on top of that?

38:23really execute where LinkedIn hasn't. I think there's a big opportunity there. Yeah, and Ben Thompson agrees with you. I pulled this quote. It's getting to be not a question of if but how many times we'll mention Ben's prolific writing on the show, but he is a quote in the Stratekery article about this. I do believe upside is magnified significantly by Microsoft. Should LinkedIn sales navigator, for example, sell into 100% of Microsoft Dynamics CRM user base, a good portion of this deal would be paid for.

38:51And that's just really interesting to think about is you raise a good point. The crux of the whole thing is can Microsoft leverage the network asset that LinkedIn has created better than they themselves have? Yeah, and it's worth a word on like on sales navigator. So this is this product that LinkedIn has put a ton of effort into and this is their attempt to.

39:13execute and capture this sort of second pillar of value on top of the network with with sales and and lead generation and the problem they've had is that like sales runs on the CRM. This is why Salesforce is such a valuable company and Unless you're directly plugged into the CRM like it's really hard to you know add a ton of value in and they've done a lot of integrations and you know sales navigator as of integration with sales force and with all the other CRM's out there but like it's really hard to do that and and for Microsoft like a they can plug it directly into dynamic switch has very small market share but they also have the way and through all the rest of the productivity suite including email the most important app for sales and many other many other you know professionally functions to be able to

40:05Plug all of LinkedIn's network asset into that like huge opportunity Yeah, and for everybody out there listens to or the works at a company that sells to businesses Sales force has become kind of the operating system of the B2B company and if a product doesn't plug into sales force you're not using it because that's the central repository for how all the different departments of your company I'm communicating with each other and it is the ground source of truth so I mean, that Microsoft has always been the we power productivity and we enable enterprises to be the most productive and efficient they can with the use of technology or through the use of technology. And that's been their mission for a long time or at least one of their missions and to see Salesforce really like etching away at that.

40:57It's almost like to defend that turf. They had to do this. I want to then get to his other two points, but I want to add in really quickly. I have to imagine, so what's also really cool about this acquisition is, as is the theme on this show, we'll get to find out all the nitty-gritty of how it happened when the SEC findings come out, when the deal closes. Which they said is this year, which likely means late December. And I'm really looking forward to that because I have to imagine that if there there must have been at least one other bidder here or the price wouldn't have gone this high. If not multiple others, but I got to imagine the other bidder was sales force has to be and this is this is awesome. This is leading right into point three for me. Somebody else was going to buy them like that there are on sale. There's only one LinkedIn like the magic of network effects makes it so that you know.

41:51They were the source of truth for where an employer has been and what they've done and what they're good at even though their skills and endorsements thing is a little bit of a joke they There was only one so you couldn't go out and buy the other LinkedIn or build the other LinkedIn It was like there was this one super valuable asset and that's sort of an interesting M&H trend because of the you know network effects and technology today It makes them immensely more valuable and it creates these these there's certainly a bidding war here. So when you're considering the value of this and you're Microsoft and you get approached by the investment banker that sort of put this together and said, hey, what do you think about this? Which I believe was Franco Tron. Again, we'll fact check this. But let's see. I know LinkedIn was advised by catalyst. Yeah. Franco Tron. Cool. And Microsoft I'm organ Stanley. You got to be thinking with the hat not of, boy, is this worth?

42:52you know, 25, 26 million dollars but more with the hat of what is the opportunity cost of it going to someone else and what's the capital outlay that we need to make in order to not have our lunch eaten and it taking a step back from that it's sort of interesting companies more so these days than ever have to look at M&A as a competitive threat and have the means the borrowing means or the cash on hand means to Do what they need to to defend their turf against a massive landscape shift like this? Yeah, I mean like let's just take as an example What if Twitter had acquired Instagram? I mean, I remember when like early days Instagram like my primary use case for it was posting pictures to Twitter So like you totally could have seen the rationale for that to happen Yeah, like how awful would that be for Facebook right now? Yeah, not good

43:49Not good. The other interesting thing that I sort of danced into here a little bit is Microsoft did not pay for this in cash. And we haven't, this is off in the case, but they did, but they didn't. Well, right, right. They did not pay for it in the cash that they carry on their balance sheet. They took out, you know, a large amount of debt because 94% of their assets are their cash. Yeah.

44:14I'm sorry, their cash is held overseas and you know with the 40-ish percent tax that they would have on unbring that back home. Repatriating the cash. Yeah, this is a huge problem for all companies that are multinational center headquartered in the US but tech companies especially have a big problem with repatriating their cash. So what they did this was not a stock deal. It was all cash.

44:38Consideration that LinkedIn shareholders are receiving but the Microsoft took out debt to finance the transaction. Yeah, and I think not entirely they took out like It's not you know $26 billion of debt, but it was a large part of the yep financing the transaction so Yeah, you know, I think that that getting back to David's point it's like there was one single huge asset with network effects here And the question is, can Microsoft, you know, squeeze more revenue out of it than LinkedIn was doing themselves? I mean, will they is we will see? Can they answer is in my mind, 100% yes. Yeah. Yeah, yeah. And then getting into my fourth point, this one's a little bit more broad. But so Microsoft has admitted that when Windows is not the future.

45:35that they are not the Windows company going forward. Of course, they know a large amount of people working on Windows, huge revenue stream. But it's operating systems are not the solo cash cow that they once were. And I shouldn't even say operating systems. Windows is not. And so in moving to this mobile first cloud first company and focusing on, you know, their cloud offering.

45:57As you look up and down the cloud stack they've infrastructure as a service and platform as a service with Azure they have software as a service with office 365 and you could look at this like okay, they're becoming the cloud services company so a business tools for recruiters and more broadly for sales and marketing also is a cloud offering that they can add to that stack of services they provide and so I think like you put on your old Microsoft hat you're like what?

46:23Are they doing and like they typically squander large M&A? So this is terrible. It's not going to go well. You talk to a bunch of current Informer Microsoft employees about this and that is the most common reaction, I would say. Yeah. Yeah. All right. Listeners. Now is a great time to thank our longtime friend of the show. Service now. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

46:51Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real. Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

47:15Yup, AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

47:32And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. ServiceNow already runs more than 100.

47:51billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

48:14So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. So I'm dying to get to tech themes. But before we do, I think it's worth spending a minute on what would have happened otherwise. We talked a little bit about somebody else buying LinkedIn. I think that's probably most likely. Clearly they were.

48:41on sale, as you say, in more ways than one. But I think, you know, if the other route is, let's say, LinkedIn and manage to stay independent, you know, they never, they're having a hard road executing on building another pillar of monetization on top of their network asset. But I want to throw in here some, a bit of discussion that's come out in the press. I think is relevant that somebody pointed out and I believe there's a, I believe there's a New York Times article about this.

49:10LinkedIn's stock-based compensation has grown hugely in the last few years, and it actually was becoming a real problem for them. So stock-based compensation, as probably many of our readers know, is made in concept in startups, but also in public companies where part of your equity package as an employee is, you get a salary, but then you also get stock options in the company.

49:38and LinkedIn had basically over the last couple of years been giving away huge amounts of equity to employees. And that dilutes the existing shareholders. So it's a non-cash expense. So it doesn't show up in like EBITDA metrics and stuff like that. But Stockbase Compat at LinkedIn went from 13 million a quarter in 2012 to 222 million per quarter in the first quarter of 2016. And the Problem there is like if you start doing that and compensating your employees obviously I'm a huge believer in employee equity, but You know, there's the thing about cap tables is like there's only ever a hundred percent like you can't have more than a hundred percent of the equity in company So anytime you give more out you're deluding everybody and so it was like the the LinkedIn stock had become this sort of like leaky sieve That was happening so that was a major problem that they would have had to deal with but then now they don't interesting. Yeah, I think

50:37But what happened otherwise, I would have gotten sold to Salesforce. And in that case, I wonder for the future of what Microsoft is doing with Dynamics if they lose out on this deal, because I feel like that's a nail in the coffin for Salesforce. You mean a nail in the coffin for Dynamics? Yeah. All right, let's go into, let's jump into tech themes, because this is, man, I've said this to so many people over the years that as a Investor, I've been such a huge fan of LinkedIn and continue to be David when did you buy LinkedIn stock? I bought right after the IPO and then I bought a bunch more after February fit and the reason for that is you know Like we've been discussing, you know, there are major challenges for the business and the company but to me there is so few

51:31real true network effects that exist in technology and LinkedIn is so powerful. I don't believe that anyone perhaps, you know, ever, ever is a long time, but any time in the foreseeable future will be able to disrupt LinkedIn. Software alone is just software. Like it's just commodity. Somebody will build something better. It will come along, but and LinkedIn is such the classic example. Like it looks like crap. Like that's all be honest. Like the product is really bad at this point. Yeah, you have like 10 second page load times. Yeah, it's really, really bad. But like nobody will ever beat it. Like I will always use it. I'll use it every day because everybody I need to interact with is on it. And if I leave and go somewhere else, they're not on it. You know, so like. Yeah. And the only thing like I can envision a future where people chip away in verticals and then those verticals expand, but we're a ways out from that. And the couple of things I'm thinking of are

52:25you know, when recruiting developers, it's very common to start on GitHub. Exactly. And then all of a sudden, there's all this data that is not actually in LinkedIn that's so much more actionable. And it's like, oh, it's just the, the mirror, you know, breadcrumb trail that they've left from doing their work creates a much richer profile. Or you can imagine sort of the same thing on Angel List like it.

52:51It moves out from founders and VCs to employees and then people are actually incentivized to keep their angelless profile up to date. That proliferates to other industries. Designed, there was a company called Behance that Adobe bought that was doing this. Totally agree. If you were going to attack LinkedIn, this is the only way to do it because it's the only way where you can actually get enough critical mass. A network is of zero value until it is of critical mass value and then it is of completely defensible value.

53:21But I really think it would be a fool's errand to try and build a horizontal wide-based professional network at this point. Yeah. I mean, in the same way that it would be foolish to build a horizontal video hosting platform at this point or a horizontal pure social network. Like I think the era of horizontal platform, horizontal platforms, once they have network effects applied, you don't disrupt them by building another horizontal platform. And I think that...

53:49Yeah, that's that's that's just an interesting thing to note when you're thinking about Starting new startups because I've heard so many people say LinkedIn sucks. I'm gonna try and on seed it and disrupt LinkedIn and Like yeah, we all have our product qualms, but you're not gonna do it by creating a better horizontal LinkedIn Yep, and I think this plays For me what one point I want to bring up about the acquisition that plays really strongly in here is LinkedIn, they're smart guys, right? And Gels, they get this. So what has LinkedIn been more terrified of than anything else in its history? It's people exfiltrating the network off of LinkedIn and stealing it out and bootstrapping it and competing with them. And LinkedIn is famously just iron-fisted in their terms about their API limits or your ability to

54:45store data that you retrieve from LinkedIn. They have the most locked down, quote unquote, open API. The API is a joke. It is an utter joke. One of the things that gets me really excited about LinkedIn being part of Microsoft as a user, as a user of products, and as a You know, as somebody who has a huge vested interest in innovation in the future is, man, could this mean?

55:16the Dawn of a real LinkedIn API because Microsoft has a very different set of motivations than LinkedIn and so long as they keep the network effect locked so long as they keep the network but it'll also be embedded into all of Microsoft products right and Microsoft is is also a developer facing company and so like if they open up the LinkedIn API to I mean I think about like even like venture capital firms like so many firms are building data you know, tools internally for themselves to be able to identify people who might be founders, great founders before they start companies or people who might be interested in joining startups before they do who are really talented. And you've just been totally hamstrung because you can't really use the LinkedIn API very well. But if now all of a sudden you can, like man, think about all the cool products and services they're going to be able to enable by that. You can, I'll just caveat this with like David, remember venture capitalists are in niche market.

56:12Yeah, exactly, exactly. But there are so many more examples, too. Yeah, good point. Should we grade it? Yeah, I think there was one. Oh, I have a question I want to post to you. Yep. So it is in Microsoft's interest to integrate LinkedIn with all their products. Keep in mind, Microsoft also owns now the LinkedIn product.

56:43and has an incentive to make that revenue stream profitable. So, do they- Which it is on without accounting for a stack-based compensation? Yep. Or I should say as successful as possible. Do they do a bunch of Google apps integrations? Also, Microsoft starts to encounter, or potentially could encounter, it'll be interesting to see how they navigate this, the platform versus product tensions, where you know, famously they didn't want to release office for iPad because as you know all too well because it competed with the competitive advantage that that surface had or you know in a million other ways you know office and windows always having tension do you run into a scenario here or is there a clear you know subservient product and leader product where it's nope we're not focused on growing LinkedIn through other people's integrations and that is a sole

57:40you know, source of value for other products at Microsoft. I mean, I got to imagine I'll be really disappointed in Microsoft and Satya and Kurt and everybody if they take the old school Microsoft approach, I can't see them doing that. But I mean, like, you know, this is this is the whole thing about, you know, Satya's leadership at Microsoft is like the way that this company becomes.

58:06relevant again and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and and

58:35isn't on Salesforce too. That's a big fail for them. Okay, conclusion. What do you got, Ben? How are we going to do this? Are we grading right now the buy or are we predicting the future and thinking like? Yeah, put yourself five years from now. Was this a good purchase for this price?

59:00So I mean, I think like today sitting here, I say this is a great buy because a year ago ish, you know, LinkedIn was worth twice this much. And it's this incredibly unique, incredibly defensible asset that is now part of Microsoft. So I'm like huge thumbs up. But by that rubric, you know, God, it's really just going to be like, can they execute on this? You know, the opportunity is massive. But but with great, you know, with great opportunity comes great. There's a lot of complexity here and it is very difficult to do these things. It's all going to come down to execution. Right now, I'm going to give it a minus right now just accounting for the huge amount of risk to come in the execution. How are we both positive on this? I was going to give it an A. I woke up my day morning being like, what? And here I am.

59:59All right, but here's here's I have some a couple rationales, but one is you know in November of 2015 the stock price was at $255. Okay, so not quite twice as much, but right and and they bought it for what? 190-ish I You know, I don't think the company's actually worth less and if you look at it like it's 25 or what is it? They bet it for 26 billion and it was it's a little over 3 billion in revenue. So like in 8x You know, yeah, I mean like there's a to acquire a Very you know a sort of premiere Internet and SaaS company for seven to eight X revenue like those companies were trading on the public markets at 10 to 15 X revenue like a year ago You know before accounting for any kind of liquidity premium. You know M&A premium. So like yeah, great. Bye. Yeah, so that's operating under the assumption that LinkedIn continued its trajectory

1:00:58You have the risk that typically comes with a startup acquisition or startup at any M&A thing of integration failing. I can't really consider LinkedIn a startup. No. Of integration failing, and you know, there's the bigger the acquisition, the farther you can fall, and a $26 billion write down would be truly like a gut punch. And I think, you know, this kind of comes down to two things. I think they needed to make this acquisition or acquisitions like this because that's their future bet. They're this cloud services company and you know, this is a cloud service that is right in their wheelhouse delivering value to enterprises to make them more productive and efficient and do their best work possible. The question is, could they, did they need to do large M&A to do it?

1:01:51They need a product offering like this for companies. They weren't going to build their own LinkedIn. That was going to fail miserably. What else could they possibly have done? I think I do have faith in this new Microsoft much more so than the Microsoft of old days that is famous for flubbed M&A. And I think when I say old days, I'll just say under Steve Balmer.

1:02:20You know, I think with Satya's leadership and the people, I really have a lot of faith in the people leading these integrations and I think that like, you know, we'll probably end up doing a follow up episode one way or another, but. Well, and here's, so here's something interesting that we haven't talked about at all on this episode, but I think it's really relevant. This is by far the biggest acquisition we have covered on this episode. Like the scale of this, like, this maybe I'm just trying to do some quick math in my head, but like, the value of this acquisition is approaching the combined value of all the other companies we've talked about combined. It may be slightly less, but it's like on the same, you know, it's in the same ballpark. We haven't done WhatsApp yet. We haven't done WhatsApp yet. So, you know, is Microsoft buying LinkedIn worth, you know, what we got here? Pixar, Instagram, Twitch, Bungie, Siri, Lucasfilm, YouTube, a company rightly, you know, for like,

1:03:17That's a lot of money. I don't think you can really look at it through that lens. You have to look at what was the cost of not doing it. I think you've got to pull the trigger. Well, that's off for now, at least to Microsoft and all our friends over there. Yeah, and to folks that linked in. I think the big question will be, can these cultures mash?

1:03:49Um, you know, or they get a LinkedIn has offices all over the world, but primarily centered in Silicon Valley Microsoft typically doesn't do well with their Silicon Valley campuses. But as we as Kurt talked about a few months ago, like, you know, they have a new mindset of when it comes to M&A of like, yeah, we don't care where you are. Like, you know, you can be in, uh, you can be a wonder list here in Berlin. You can be a complete, you mean Silicon Valley? Like, it doesn't matter, you know, yeah, just a lot of flights. Yeah.

1:04:15Fortunately, they're close. Well, fortunately, you know, Alaska Bob Virgin. That's a great place to leave that. That's a great place to leave it. Do you want to do a quick carve out? Yeah, yeah. Mine's super quick, because I think a lot of people probably will have seen it already, but the code conference was last week, and it was bookended by Elon and Jeff Bezos. And I haven't watched the Jeff one yet, but the Elon Musk one is so fantastic. So go watch the Elon Musk interview at the code conf.

1:04:44He he just like has this incredible way of dancing back and forth between like total dude in a space suit That is like talking about the future in a way where you're like what is this where is this the one where he says there's like an 80% chance for living in a computer simulator Yeah, but then there's other things where like the way that he explains why the first stage rocket lands on the drone ship. Unfortunately, it blew up today, but you know, the last four have landed on the drone ship. He does a really good job of like explaining why the drone ship needs to be where it needs to be and position the ocean and for anybody that's sort of like into the SpaceX story, understanding any of the physics behind that super approachable, very interesting, and clearly a visionary. Cool. I am grinning widely here because

1:05:31Literally no joke was my my car about was was the baseless talk so this is great because I have not yet watched the Elon talk so now I gotta watch it and you gotta watch and everybody listening has to watch the baseless talk. It is fantastic You know he man that guy is just awesome, but One of my couple quick things. I love from it You know one either they ask him like what?

1:05:59God, there's so much going on in Amazon. How do you think about this? How do you think about your businesses? And he says, I think about innovation. He's like, I like to think about when I'm starting, when we're starting a project or something super ambitious, Alexa or whatnot. What about our customers isn't going to change over in the foreseeable future? So much is changing so fast in technology. But what are the core things that are not going to change?

1:06:29And and else that that reminds me of LinkedIn, you know like I sit here today like I was a LinkedIn happy LinkedIn shareholder for a long time because I just sat there and I was like I'm gonna be using LinkedIn 20 years from now No doubt in my mind. Yeah, so anyway, there we go code conference. It was good this year Awesome. All right listeners now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what

1:07:18changes actually created value for customers. And how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences, or just evolving your existing core product, go to Statsig.com slash acquired to get started.

1:07:48Well, we're leaving you. I'll say one more time, because I think it's probably more useful at the end of the episode than the beginning. Would love it if you could leave us a review on iTunes, and if you liked it, show the episode with your friends. See ya.