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Three Reasons Why Microsoft Should Buy LinkedIn

NEW YORK (TheStreet) -- Since Bill Gates stepped down as CEO of Microsoft(MSFT - Get Report) in 2000, the stock has been sluggish.

Microsoft has struggled because the company lacks a vision for the future. As shown by the chart below, the multiple on Microsoft's stock has contracted as investors expectations' of growth have dimmed. To turn the tide, Microsoft needs to take bold action. One bold step would be to buy LinkedIn(LNKD - Get Report). Here are three reasons why I believe Microsoft should do that.

MSFT ChartMSFT data by YCharts

MSFT PE Ratio (Annual) ChartMSFT PE Ratio (Annual) data by YCharts

1. Jeff Weiner Becomes Microsoft CEO

Microsoft has been looking for its next CEO since after Steve Ballmer announced his retirement last year. LinkedIn CEO Jeff Weiner would be a great choice to replace Ballmer.

Weiner, who joined LinkedIn in 2008, has proven to be a capable leader. Since going public in 2011, LinkedIn has consistently surpassed high expectations. It's not known whether Weiner would be willing to leave LinkedIn to become Microsoft CEO. But if Microsoft were to buy LinkedIn, then Weiner would become the logical choice to be Microsoft's next CEO.

2. Microsoft Goes Social

Social media has become one of the most important aspects of the Internet and of technology more broadly. Microsoft failed to anticipate the growth of social media as an important business opportunity. 

The only way now for Microsoft to make itself a major playing in this emerging part of the technology industry is to make an acquisition. The three most relevant social networks are Facebook(FB), Twitter(TWTR) and LinkedIn.

With a current market cap of over $100 billion, Facebook is likely too large for Microsoft to acquire. Twitter, with a market cap close to $40 billion, is also a rather large target. Plus, it has yet to prove itself as a public company that can earn profits.

LinkedIn is clearly the best fit for Microsoft. LinkedIn has a market cap of about $25 billion and has proven it is able to monetize its social-media platform.

Like Microsoft, LinkedIn focuses on corporate offerings. Microsoft could leverage existing relationships to push new LinkedIn offerings to big customers and leverage its deal to acquire Nokia's devices and services business by building out special LinkedIn offerings on Microsoft devices.

3. Microsoft's Cash

Microsoft is sitting on close to $80 billion in cash. Given LinkedIn's market cap, a reasonable premium would put a LinkedIn deal at close to $40 billion. Microsoft could pay for the deal solely with cash. That means that Microsoft wouldn't need to use its stock as a currency to pay for the transaction, which is important because its shares are trading at a cheap valuation and a major issuance of shares would be highly dilutive.

As shown by the chart below, since 2000, Microsoft has spent a lot of cash buying back stock. The strategy hasn't led to gains for Microsoft shares because it fails to address Microsoft's lack of a vision for the future. Using cash to buy LinkedIn would address that and may lead to a higher price-to-earnings ratio for Microsoft's shares.

MSFT Stock Buybacks (Quarterly) Chart

MSFT Stock Buybacks (Quarterly) data by YCharts

At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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