Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

LinkedIn CEO Jeff Weiner must have fielded constant phone calls from big tech companies eager to buy his company whenever he was ready. The fact that Weiner and other LinkedIn backers said yes this time is telling about the changing state of mind in once-confident corners of the tech world.

Microsoft said on Monday that it had struck the biggest acquisition in its 41-year history by agreeing to buy LinkedIn for $26.2 billion, or $196 a share. That's nearly 50 percent higher than LinkedIn's share price on Friday, or more than 26 times LinkedIn's estimated earnings before interest, taxes, depreciation and amortization. LinkedIn shareholders can cheer the deep pockets at Microsoft, which has more than $105 billion in cash and short-term investments and a CEO who is ready and willing to do huge acquisitions. 

A Sale to the Rescue
LinkedIn shares were trading higher than Microsoft's purchase price as recently as mid-January. After then, a disastrous earnings report sent shares tumbling.
Source: Bloomberg

But while LinkedIn is receiving a big premium from its share price before the weekend, Microsoft is paying about 28 percent less than LinkedIn's all time stock high of nearly $271 in early 2015. Back then, LinkedIn was trading at more than 11 times its expected revenue for the year, according to data compiled by Bloomberg. On Friday, LinkedIn was trading at less than five times its expected revenue for 2016, Bloomberg data show. 

Deflated Expectations
LinkedIn is selling to Microsoft near a low point in the company's valuation
Source: Bloomberg

Like a flabby couch potato who is forced to have an angioplasty and gets scared into starting to diet and exercise, LinkedIn and other software firms with once fat valuations are getting spooked into selling. 

The big change for LinkedIn -- and for many once highflying software and web companies -- was a change of heart among investors beginning late last year. In just a few short months,  the valuation of a closely tracked stock index flipped from the highest point in six years to pure panic. In February amid this fear, LinkedIn's share price fell nearly in half on a single day after the company posted disappointing revenue and forecast figures. 

microsoft-buys

Imagine being a LinkedIn director after that freefall. You know investors started to have doubts about the prospects of whole swaths of the tech sector. Your company won't have the benefit of the doubt anymore. Revenue growth is no longer easy. Turning LinkedIn profitable is a slog. Once LinkedIn shares started to recover a tad, a sale suddenly looks much more palatable. 

It's no longer at the nadir price LinkedIn would have received if Weiner answered "yes" in February or March to his barrage of phone calls. Now LinkedIn directors can pat themselves on the back and feel good about selling at a big price and avoid an uncertain future with investors no longer sanguine about endless growth in tech. Other companies that were hit with similar market panics are also pulling the trigger on sales. Marketing software firm Marketo recently agreed to a private equity buyout after it had rebounded from a LinkedIn-like stock fall. Marketo's sale price of $35.25 was also below its record high of $45 in 2014. 

A health scare changes people. And a sudden stock swoon changes a company and a whole industry, too. Fear is the best motivator.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net