Microsoft's unexpected decision to purchase LinkedIn is the biggest news on Wall Street. The acquisition of the business-focused social media company for $26.2 billion -- a 50% markup on LinkedIn's share value -- has created ripple effects throughout the social media industry.
Shares of social media companies largely rose in response to the news with investors hopeful that other big-time acquisitions could bring rewarding returns on investment. Fears of a so-called social media bubble are on hold in light of the massive acquisition.
Are more deals possible? It's hard to say, but the market is definitely hopeful. Here's how other social media stocks reacted and are likely to fare in light of Microsoft's massive acquisition. Each company faces challenges, although there is one that is clearly best situated to thrive now and in the future.
Twitter might be one of the most talked about social media stocks, but it's for all the wrong reasons. Share value is declining. Earnings have been incredibly disappointing, and user growth is slowing down.
When news of the LinkedIn hit, Twitter's stock rose nearly 10% over the following two days. Speculation that Twitter could be bought out for a premium is high. The all-time lows of the stock indicate that Twitter could be something of a bargain. However, the speculation remains merely speculation. Twitter has some deep-rooted problems that could keep any potential purchasers away.
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Another underperforming social media company is Yelp, although the crowd-sourced business reviews site hasn't disappointed to the extent that Twitter has. Yelp's stock rose on the news, but it ended up dropping by the end of the trading day. Most of the acquisition focus is on Twitter, yet Yelp is also seen as a possible acquisition target.
Yelp is a much different breed than Twitter, LinkedIn or Facebook due to its fairly limited scope. The company reportedly considered a sale a year ago that sent shares rising by 15%, but nothing came of it. With shares down 70% since their 2014 highs and a market cap of $2 billion, speculation of an acquisition will likely continue.
The world's leading social media company remains in a class of its own and was largely unaffected by the news of LinkedIn's acquisition. Shares are up nearly 10% on the year, and April's first-quarter 2016 results are exceeded earnings estimations. The company is on very solid footing.
Facebook is so big and so unlike other social media companies that it appears to be insulated from industry-related news. That could be even more of the case as Facebook continues to diversify its business model beyond ads on Facebook. After acquiring virtual reality startup Oculus for $2 billion in 2014, Facebook is finally aggressively upping its involvement in the lucrative video game industry.
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A Unique Case
Whether or not you believe Microsoft's $26.2 billion acquisition of LinkedIn was a wise or not, there's no denying that LinkedIn was always a step above most other social media companies. LinkedIn, with its user base of career-minded professionals, has been effective both in terms of monetization and in popularity.
LinkedIn has always been seen as the Facebook for business, yet it's one of the few social media companies that Facebook hasn't been able to successfully mimic. The professional-focused nature of LinkedIn must have been especially appealing to Microsoft and their Office division. Microsoft has already announced that LinkedIn will help with their data gathering and supplement their existing programs (Office, Skype, Outlook).
No other social media services, aside from maybe Facebook, can rival LinkedIn when it comes to the value of its users. Out of all the social media companies out there, the one with the ripest conditions for an acquisition is probably Twitter, and pressure on the company's management is enormous to bring some returns to investors. However, that pressure doesn't mean there are interested buyers out there.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.