Business social networking site LinkedIn (click ticker for report: ) announced Wednesday afternoon that it would execute a secondary public offering expected to close on September 10. LinkedIn will offer 5,381,166 shares of its Class A common stock at a price of $223 per share for proceeds of $1.2 billion. When a well-capitalized company like LinkedIn offers stock, it can often signal that the company believes its shares are overvalued.
As of its most recent quarter, LinkedIn had over $800 million in cash and short-term investments against no long-term debt. The company was also free cash flow positive (albeit free cash flow wasn’t robust) in fiscal year 2012. LinkedIn isn’t in dire need of cash, so we think the company either has a large acquisition in mind or it could simply be looking to capitalize on its expensive stock, creating value for shareholders. Anytime a firm raises cash at a level above our estimate of intrinsic value, management is creating value for existing shareholders, in our view.
Potential Targets
The rumored potential target for LinkedIn is German business networking site Xing. Rumors began circulating several weeks ago, with the big hurdle to an acquisition being Hubert Burda Media Holding GmbH which currently owns 52.6% of the company and would demand a large premium.
Interestingly, we aren’t huge fans of this potential acquisition. For one, LinkedIn already has a tremendous global presence, and in a global economy that deemphasizes the importance of location and region, we think a social network with a global network is infinitely more valuable.
Additionally, revenue growth is significantly slower at Xing than it is at LinkedIn. Second-quarter revenues at the firm were up 15% year-over-year to 20.9 million euros—not a terrible growth rate by any means, but well below what we’ve come to expect from LinkedIn (59% revenue growth in the most recent quarter). Earnings were 30% higher than a year ago, but at 2.7 million euros, the figure would hardly impact LinkedIn’s bottom line.
Plus, LinkedIn already fills the business networking position of someone’s online life. Facebook (click ticker for report: ), Twitter, Instagram, LinkedIn, and even SnapChat all fill different roles in one’s “social” life—Xing would overlap directly with LinkedIn, so we believe its future growth potential isn’t strong.
What about Monster (click ticker for report: ) as a potential acquisition candidate? The stock trades at an incredibly low EV/EBITDA multiple, but the company is on the road to irrelevancy. LinkedIn is clearly stealing market share as Monster’s revenues flounder, and we simply do not see a compelling reason for LinkedIn to take out its competitor when nature appears ready to take its course.
In our view, neither acquisition makes much sense. A merger with either Paychex (click ticker for report: ) or ADP (click ticker for report: ) would be a significantly better strategic fit (given the human resources overlap), but we doubt either occurs as ADP possess a larger market capitalization than LinkedIn, and Paychex would cost the company at least $16 billion (20% premium to current enterprise value).
Valuentum’s Take
LinkedIn stated that it would use the offering to “bolster” the firm’s already strong balance sheet. Without many logical acquisition targets, the offering could mean higher capital investment spending going forward, or as we speculated earlier, the company is simply raising money while its stock is incredibly expensive. We have no interest in establishing a long position in LinkedIn in the portfolio of our Best Ideas Newsletter.