Can Facebook Buy LinkedIn? No

February 11, 2013 by Douglas A. McIntyre

Jim Cramer of TheStreet Inc. (NASDAQ: TST) and The Motley Fool believe that Facebook Inc. (NASDAQ: FB) should buy LinkedIn Corp. (NYSE: LNKD). LinkedIn has three lines of revenue, all of which come from professional markets. And the professional social network makes money on each one of those. Facebook has one line of revenue, and that will not change, according to many Wall St. experts. Facebook does not make much money, which may be why it still trades below its IPO price. But Facebook cannot afford to buy LinkedIn, so the matter is academic.

In the fourth quarter of last year, Facebook made $64 million on revenue of $1.585 billion. That is a poor margin for any successful company. LinkedIn made $11.5 million on revenue of $303.6 million. At the end of last year, LinkedIn had 200 million members to Facebook’s one billion. Obviously, the yield per member at the two companies greatly favors LinkedIn. That is a very good reason for Facebook to want to buy the smaller firm.

The math of a buyout makes a deal difficult, if not impossible. LinkedIn has a market capitalization of more than $16 billion. Its share price has moved up relentlessly, and at $150 has almost doubled from its 52-week low. LinkedIn investors would expect a huge premium, which means that total cost of a buyout by Facebook would be $25 billion, if not more. A small number of shareholders, led by chairman Reid Hoffman and CEO Jeffrey Weiner, control LinkedIn’s shares. That means the only leverage for Facebook would come through two or three people.

Facebook, which many of its proponents argued was worth $100 billion, now has a market cap of $68 billion. Facebook could not borrow $25 billion to buy LinkedIn. The world’s largest social network has nearly $10 billion of cash on hand. But, even with LinkedIn’s apparently strong future, it does not generate enough money to make a buyout reasonable at $25 billion. Facebook could offer 35% of its stock to buy LinkedIn. Even though CEO and founder Jeff Zuckerberg controls Facebook shares, many investors would stage a violent protest in the face of what would be tremendous dilution.

Facebook cannot buy LinkedIn, so the speculation is useless.

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