I just had someone send me an article titled “REASON BEHIND THE MICROSOFT-LINKEDIN DEAL”. The premise behind that article is that stock-based compensation (the accounting term for this piece of the compensation pie) was a major driver behind LinkedIn’s decision to be acquired by Microsoft. LinkedIn did use stock-based compensation more heavily than many companies, but that alone would not be a good reason to desire an acquisition at a value significantly less than the 52 week high. Stock-based compensation includes virtually any type of pay where the individual gets ownership in the company at some discount to the value and it is eventually owned in full by them. In order for stock-based compensation to factor into the decision at all, there would need to be some potential upside in that compensation. This is where the details become important. NOTE: I am not assuming that the value of employee and executive equity compensation was a driver, but the details explained below may clarify why it was not a deterrent to the deal.
The Microsoft deal valued LinkedIn at $26.2B. Since August 14, 2013, LinkedIn’s market cap has been near or above that number the majority of the time. There was a period from March 2013 through July 2013 when the value was materially less (below $24B). There was another period in August and September of 2015 where the value was also less. Then there was the recent period from February 2016 through May 2016 where the value dropped precipitously (as low as $13.3B) and stayed low until the announcement of the Microsoft deal. So perhaps one-third of the past three years LinkedIn has been valued significantly below the current deal price. How does this fact impact the place of “stock-based compensation” in a company where it is heavily used?
The key is in the type of equity. Silicon Valley Pre and Post-IPO companies used stock options almost exclusively until the last six or seven years. Over the past several years more and more companies have moved to the use of RSUs (Restricted Stock Units). Stock Options have a strike price, or exercise price, that is generally equal to the price on the date of grant. The stock price must increase for the options to have real value to the holder. The value is the difference between the strike price and the price the day the options are exercised (and perhaps sold on the same or a later date). Traditional RSUs have no price hurdle. Their value exists as long as the company has value.
Partially in response to dilution concerns, complaints about overleveraging of pay and generally negative opinions from shareholders, politicians and the media companies have increasingly allocated a larger portion of their stock-based compensation budget in the form of RSUs, rather than stock options. LinkedIn was an early and enthusiastic member of the companies who moved to RSUs. This allows employees in a transaction at a fairly flat value to obtain some value for the equity they received in lieu of additional cash pay or because of strong performance.
If LinkedIn had used exclusively stock options over the past 3 years, most of those options would have little or no readily ascertainable value in the Microsoft transaction. This would have been demotivational for LinkedIn staff and executives. It would have also been costly to Microsoft since they would have needed to find a way to replace the lost potential of the awards. In replacing LinkedIn RSUs with Microsoft RSUs, or their cash equivalent, the company is adding little to the cost and complexity of the transaction.
This little technical detail underlying the big numbers of the transaction may provide some additional insight into the value of the deal to LinkedIn. It also brings up the question of why any company would use stock options. Stock Options are an aspirational compensation instrument. In the right circumstances (a low or hard to value company that is followed by a fantastic rise in value) they can be an incredibly effective and inexpensive way to get great talent to perform well. They also offer a flexibility that cannot be matched by other forms of pay. But, without that strong rise after the grant date these potential jet engines of pay can become lead weights that can slow or even stop momentum.
Knowing who you are as company and who you may become in the future is critical to deciding the right mix of compensation tools. It is rare that a company is always right, so perhaps consider how to blend these elements (and possibly others) into a total rewards program that will support your needs regardless if times are tough or flush.
I seriously doubt that equity compensation values were among the top 5 or 10 drivers behind the Microsoft / LinkedIn deal, but the fact that LinkedIn was a heavy user of RSUs was certainly not a negative factor in negotiations.
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.