Microsoft’s impending acquisition of LinkedIn has many speculating on what the move will mean for the future of both companies, as the professional social network comes with a number of assets that are likely to give its new parent company a serious edge on competitors, including the world’s largest SaaS company, Salesforce.
However, if you own a SaaS business, you might be more interested in how Microsoft reached the $26B offer, and what that might mean for your business’ valuation.
While the deal does set some precedent, it’s important to keep in mind that LinkedIn had a number of aspects that made it an attractive acquisition, which may or may not be relevant to your business. One thing is for sure, though, and it’s that SaaS M&A is on the rise.
How Was LinkedIn Valued?
- 8.1X trailing 12M revenue; 6.7X forward 12M revenue
- $196 per share (a huge 50% premium to pre-announcement share price)
It’s important to keep in mind that this sale multiple is on the premium end of recent public market SaaS acquisitions. This is a reflection of both LinkedIn’s strong fundamentals and Microsoft’s strong desire to become a relevant B2B player in the enterprise cloud software space. Most industry commentators are citing the acquisition as giving Microsoft the ability to smarten up its Dynamics CRM with data from LinkedIn’s 433M users, which could prove to be a significant growth driver in the future. The arguably rich multiple is a small price to pay for Microsoft, who will be aiming to deter other potential suitors from bidding now that LinkedIn’s acquisition data has been made public. In perspective, Tech Crunch estimates that average SaaS revenue multiple for a publicly traded company is between 4X and 6X.
While LinkedIn’s investment case for Microsoft is unique in many ways, Redpoint venture capitalist Tomasz Tunguz highlighted that, despite this, the fundamentals are still important, and one of the most significant factors in the valuation was cash flow margin:
“…The highest correlated factor to acquisition multiple in 2016 is cash flow margin. Revenue growth follows, and gross margin is third. Net income (profitability) is last. This is not surprising,” Tunguz wrote on his blog.
A Strengthening Tech M&A Boom?
Many analysts and industry commentators are saying that the acquisition is a sign of a strengthening tech M&A boom, as the deal reflects demand for both online companies that have a large, well-defined audience, and software businesses with subscription-based revenue and a solid standing in a high-growth market, according to Financial Times.
2016 has already seen $40B in SaaS M&A over six major deals (compared to just three deals in the same period in 2015, and two in 2014), so this year could be the biggest yet for mergers and acquisitions in the industry. Even smaller companies that are still trying to scale should find some helpful facts from the LinkedIn deal (for instance, LinkedIn’s dual revenue streams, from both advertising and subscriptions, helped it earn a higher multiple), as well as other big acquisitions made this year, including Blue Coat and Marketo.
While SaaS might be heating up as the industry of choice for acquisitions this year as a business owner, it’s important to focus on your own unique positioning entering into a sale, as market trends and activity alone won’t give you an accurate view of the value of your online business. You can read more about that here, and why small SaaS businesses are usually valued on a multiple of SDE rather than revenue.
One thing is for sure – the Microsoft and LinkedIn deal surprised everyone. What did you think of it? Let us know in the comments below: