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Comment by bduerst | Hacker News Reader

Yeah, even assuming Microsoft cuts losses and makes the company profitable again through some product integrations, it's still a huge price tag.

LinkedIn has stalled growth and brought in $2.9 billion in rev last year, which means that all things constant it will take nine years to cover the $26 B price tag.

Microsoft must really have some big plans for it to justify the costs.

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That's not actually that bad, if that revenue were profit. Plugging it into a discounted cash flow calculator, this investment breaks even at a discount rate of 11%, which is much better than Microsoft could get elsewhere. At a discount rate of 3%, they'd only need to generate about $750M in profit to break even.

Problem is that revenue isn't profit, and LinkedIn is currently losing money, which makes their financial value negative. So Microsoft must be assuming one of three things:

1) LinkedIn will continue to grow, enough to raise revenues by a billion or so with minimal marginal expenditures.

2) They can cut costs enough to get to ~25% margins without losing market share.

3) There's strategic value when combined with Microsoft's existing business.

Any one of these seems like a reasonable (though far from guaranteed) bet.

Eh, I gave them the benefit of the doubt and figured they were valuating based on price/sales ratio, since earnings have been negative lately and that's probably the only way to come close to the 26B number.

With all things constant it will take a lot more than 9 years. The 2.9 billion in revenue doesn't account for the costs of running their business. Microsoft would need to make 26 billion in profit to cover the price tag.

Even more than that when considering the opportunity cost of not putting $26B into a stable investment vehicle.

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