M&A Case Study | Microsoft + LinkedIn Merger Example

M&A Case Study: Microsoft-LinkedIn Acquisition Timeline

M&A transactions can get complicated, with no shortage of legal, tax and accounting issues to sort out. Models are built, due diligence is performed, and fairness opinions are presented to the board.

That said, getting a deal done remains a very human (and therefore entertaining) process. There are some great books that detail the behind-the scenes-drama of major deals, but you don’t have to pull out your Kindle to get the scoop on how things played out for public deals; Much of the negotiation detail is presented in the surprisingly engaging “background of the merger” section of the merger proxy.

Below is a behind-the-scenes look at the Microsoft-LinkedIn merger, courtesy of the LinkedIn merger proxy.

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Month 1: M&A Process Begins

It all started on February 16, 2016, 4 months prior to the deal announcement, with the first formal discussion between the two companies.

On that day, LinkedIn CEO Jeff Weiner met with Microsoft CEO Satya Nadella to discuss ways to enhance the ongoing commercial relationship between the companies. At the meeting, they discussed how the two companies could work together more closely, and the concept of a business combination was raised. This appears to have started LinkedIn’s exploration of a formal sales process.

3 suitors have first dates with LinkedIn in February and March

LinkedIn also began to entertain inquiries from 4 other potential suitors, which the proxy called “Parties, A, B, C and D.” The most serious other bidder was Party A, widely rumored in the press to be Salesforce. Parties B and D were rumored to be Google and Facebook, respectively. Party C remains unknown. To recap:

February 16, 2016: Linkedin CEO Jeffrey Weiner and Microsoft CEO Satya Nadella discuss a potential merger for the first time.
March 10, 2016: Nearly a month after the Weiner/Nadella discussion, Party A (Salesforce) requests a meeting with Weiner to float the idea of acquiring LinkedIn. Several days later, Weiner meets with Salesforce CEO Marc Benioff about the potential deal. A week later, Benioff tells Weiner that Salesforce has hired a financial advisor to analyze the potential acquisition (turns out it was Goldman, who bet on the wrong horse).
March 12, 2016: Linkedin’s controlling shareholder Reid Hoffman has a previously scheduled meeting with a senior executive from Party B (Google). After the meeting, the Google executive seeks out separate meetings to be held later in the month with Hoffman and Weiner in order to discuss a potential acquisition.

Month 2: It’s getting real

Qatalyst Partners founder Frank Quattrone

Linkedin selects Qatalyst and Wilson Sonsini

March 18, 2016: LinkedIn brings in Wilson Sonsini as legal counsel and chooses Frank Quattrone’s Qatalyst Partners as its investment banker 4 days later. (LinkedIn adds Allen & Co as a secondary advisor a month later.)

Qatalyst does its job

March 22, 2016: Qatalyst reaches out to another potential buyer (Party C) to gauge interest. (Party C informs Qatalyst it’s not interested 2 weeks later.)

Facebook dips its toe, but the water’s too cold

April 1, 2016: Hoffman reaches out to Facebook to gauge interest.
April 7, 2016: Facebook bows out. It’s officially Salesforce vs Microsoft vs Google!

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Month 3: Full-on negotiations

LinkedIn holds due diligence calls

April 12, 2016: Linkedin management, Sonsini and Qatalyst hold a due diligence call with Salesforce and its advisors. The next day, they have a similar call with Microsoft and its advisors. The day after that, they have a similar call with Google.

Offer price negotiations get real

April 25, 2016: Salesforce submits a non-binding indication of interest of $160-$165 per share — a mixed cash stock deal with up to 50% cash — but requests an exclusivity agreement.
April 27, 2016: In light of the Salesforce offer, Qatalyst checks in with Google. Weiner checks in with Microsoft.
May 4, 2016: Google officially bows out. Microsoft submits a non-binding indication of interest at $160 per share, all cash. Microsoft also says it’s willing to consider stock as part of the consideration, and it also wants an exclusivity agreement.

Salesforce CEO Marc Benioff

Over the next several weeks, Linkedin negotiates with Salesforce and Microsoft, slowly bidding up the price:

May 6, 2016: LinkedIn says it will agree to exclusivity with whichever party agrees to $200 per share. Neither suitor agrees.
May 9, 2016: Salesforce comes back with $171, half cash, half stock.
May 11, 2016: Microsoft offers $172 all cash, but is open to stock if desired by LinkedIn. The same day, LinkedIn and its advisors meet to decide next steps. An interesting point is made: Hoffman prefers a mix of cash and stock in a transaction so the deal can qualify as a tax-free reorganization (enables LinkedIn shareholders to defer taxes on the stock portion of the consideration). Qatalyst goes back to the bidders.
May 12, 2016: Qatalyst reports to LinkedIn that Microsoft and Salesforce are growing tired of the incremental bidding, or, in proxy-speak, Salesforce expects that going forward, “all parties’ bids will be considered at once” and Microsoft expresses “a similar concern relating to continued incremental bidding” and seeks “guidance with respect to an acceptable price.” LinkedIn holds a meeting and decides to request a “best and final,” due the next day. Importantly, it appears that Hoffman favors Microsoft. During the meeting, he tells the LinkedIn Transactions Committee (a committee set up by the board to specifically analyze the deal process) that he wants to let Microsoft know he will support Microsoft as the winning bidder if they offer $185.
May 13, 2016: Microsoft submits $182 per share, all cash, with flexibility to include stock if requested. Salesforce also submits $182 per share, but 50% cash, 50% stock. The stock component has a floating exchange ratio. As we’ve learned earlier, that means the value of the stock portion of the consideration is fixed (meaning less risk for LinkedIn). Regardless, LinkedIn chooses Microsoft.
May 14, 2016: LinkedIn and Microsoft sign a 30-day exclusivity agreement the next day, prohibiting LinkedIn from soliciting other proposals. Broadly speaking, this type of agreement is called a letter of intent (LOI). It formalizes deal discussions and sets a timetable for signing a definitive agreement.

Month 4: Salesforce not out yet

For several weeks after exclusivity, Microsoft ramps up its due diligence. Various merger agreement stipulations between Microsoft and LinkedIn are negotiated. A major negotiation concerns the termination fee.(Microsoft initially sought a $1B termination fee, which LinkedIn ultimately negotiated down to $725M).
May 20, 2016: Salesforce revises its offer to $188 per share with $85 in cash and the rest in stock. One caveat: Even though the offer is higher, the exchange ratio is fixed in the new offering, meaning LinkedIn takes on the risk that Salesforce’s share price will drop between now and closing.
While LinkedIn feels the revised offer is essentially equivalent to the prior one, it also has to figure out “the appropriate manner in which to address the revised proposal in light of the LinkedIn Board’s fiduciary and contractual obligations.” LinkedIn decides it cannot respond to the revised Salesforce offer in light of exclusivity with Microsoft. It defers the issue to a time after Microsoft’s exclusivity ends and after Microsoft concludes its due diligence.
June 6, 2016: Salesforce comes back again. Its share price has grown to a point where its fixed-exchange-ratio offer amounts to $200 per share. LinkedIn decides it will still not respond, but will go back to Microsoft to let them know that as the exclusivity nears, the original $182 is “no longer supportable.” LinkedIn will encourage Microsoft to up the bid to $200. Hoffman is now OK with all cash.
June 7, 2016: Weiner and Hoffman both separately deliver the bad news to Nadella, who replies that a higher offer will necessitate a discussion of synergies. Translation: If you want us to pay more, you’ve got to show us where we can trim LinkedIn’s costs.
June 9, 2016: LinkedIn CFO Steve Sordello sends Amy Hood, his counterpart at Microsoft, an analysis of potential synergies. Later that day, Microsoft agrees to bump the offer to $190 per share, all cash.
June 10, 2016: LinkedIn emphasizes to Microsoft the need to go higher, and suggests that a deal will get done at $196 per share, all cash, contingent on approval by LinkedIn’s board.
June 11, 2016: Nardella tells Weiner in the morning that the Microsoft board has agreed to $196 per share, all cash. Later that morning, legal counsel for both sides button up the negotiations regarding breakup fees and the final version of the merger agreement.
Microsoft lawyers had been trying to get Weiner and Hoffman to sign a lockup agreement (legally called a “support agreement”) that would contractually obligate them to vote for the deal, protecting Microsoft further from Salesforce. This was refused by LinkedIn.
Later in the afternoon, the LinkedIn board meets to decide on the deal. It discusses whether it makes sense to agree to the deal given the breakup fee of $725 million. It also considers that Salesforce seems willing to keep raising its offer. But this uncertainty is tempered, among other factors, by the fact that Salesforce’s offer is contingent on its shareholders’ approval while Microsoft’s is not.
Hoffman indicates that he supports the Microsoft offer and Qatalyst presents its fairness opinion.
Finally, the board unanimously approves the transaction.
June 13, 2016: Microsoft and LinkedIn issue a joint press release announcing the deal.

Month 5: Salesforce not out yet. … again

July 7, 2016: LinkedIn’s Transaction Committee meets to discuss the fact that Benioff (Salesforce) sent an email to Hoffman and Weiner after reading the “background of the merger” section of the preliminary merger proxy (filed 3 weeks before the definitive one that this timeline summarizes). Benioff claims that Salesforce would have gone much higher, but LinkedIn hadn’t been keeping them in the loop.
Remember, the LinkedIn board has a fiduciary responsibility to its shareholders, so Benioff’s email must be taken seriously. During the meeting, the Transaction Committee decides that LinkedIn had in fact done enough to communicate with Salesforce. It does not respond to Benioff’s email.