Microsoft Corp announced Monday’s that it had entered into a definitive agreement to acquire LinkedIn Corp ($LNKD) for $196 (cash) per share. The transaction is expected to close this calendar year (assuming approvals are obtained from $LNKD shareholders and the appropriate regulatory entities).
$MSFT anticipates modest dilution of non-GAAP earnings for both the remainder of fiscal 2017 as well as in 2018, but the company expects the deal to be accretive by 2019.
Broadly speaking, market observers’ reaction to the news appears mixed, at best. On the one hand, a MarketWatch article quotes Roger Kay, of Endpoint Technologies Associates, as saying he believes Microsoft could end up writing down this purchase, as was the case with $NOK’s mobile phone unit. UBS’ covering analyst, Brent Thill, likewise reminded clients of Microsoft’s checkered past with regard to multi-billion dollar acquisitions, pointing out that $MSFT also wrote off substantially all of the $6.33 billion cost of aQuantive, which the company bought back in in 2007. Sarah Hindlian, of Macquarie Research, too views Microsoft’s latest M&A endeavor with pessimism, suggesting that $LNKD’s negative margins and decelerating business do not command the hefty premium $MSFT agreed to pony up.
Conversely, pundits such as Pat Moorhead, founder and principal analyst at Moor Insights & Strategy, is more open to the potential synergy between the firms. Moorhead says it is important to consider what the combination “could be”. James Cakmak, of Monness Crespi Hardt, suggests $LNKD’s addition will amount to a modern-day equivalent of what the roll out of Windows meant to enterprise clients in the 1990s. Analysts at Citi and Stifel have likewise given the deal a thumbs up.
Despite the unclear consensus, our work is unequivocal: we d o not like $MSFT at present. As is illustrated in the chart below, our primary timing models call for share price declines over the next year or so and the next couple to several years. Such price action would not necessarily be out of character for a stock that was essentially trendless for much of the period between 2002 and 2011.
Weekly momentum for Microsoft (not pictured) is also worsening. After plateauing at the April price peak, this medium-term measure appears likely to deteriorate into July, suggesting the existence of near-term price pressures in addition to the longer-term alarms our models are sounding.
In conjunction with the unfavorable momentum conditions evident at various degrees of trend, we also cite disturbing fundamental developments, such as $MSFT’s four consecutive quarters of YoY revenue declines, falling earnings estimate revisions (for the current quarter, next quarter, current year and next year) and a declining average broker recommendation as headwinds to $MSFT’s further progress.
Thus, despite Satya Nadella’s large bet on $LNKD, we do not expect a rosy outcome for $MSFT over medium, long and longer terms. Not only does Microsoft’s track record with $3+ billion mergers give us pause (the Skype deal, is probably the company’s sole success story in this space, but still $MSFT reportedly overpaid for the VoIP player–$4.5 billion more than $GOOG offered), but momentum indications as well as recent fundamental performance suggest shares are due for a corrective cycle. Accordingly, we prefer Tech names such as $IBM (which trades at an unassuming 11.4 X ‘s TTM earnings, boasts constructive momentum and improving fundamentals) and $BABA (which also sports a supportive momentum backdrop as well as low expectations).