Andrew Ross Sorkin
“Let me explain”.
Jeff Weiner, CEO of LinkedIn, sent a lengthy memorandum to its employees on Monday 13 June, pointing to a number of reasons for the surprise decision to sell the company to Microsoft for 26.200 million. Most importantly, he said, was the weight that Microsoft gave to Linkedin “to control our own destiny.”
But there may be another reason he did not mention.
That reason could be weighed down share price of the company and its -some would call excessively dependent on the compensation based on shares.
a fateful day in early February, the price of the shares of Linkedin he slumped by more than 40 percent following the forecast would have a weaker than expected growth this year. The share price had hovered around the $ 225 in early 2016; a month later briefly came close to a hundred dollars.
That rapid devaluation not only posed a problem for investors. Employees Linkedin are paid largely in stock and therein lies the crux: all the new skyscraper of 26 floors that opened the company in San Francisco in March, as well as the headquarters in Mountain View, California, was persistent rumors that Linkedin could not keep their best talent if the market continued pummeling their income.
Among the companies of Silicon Valley, “Linkedin is one of the most bases its compensation in the price Actions; there’s no doubt, “he said in an interview on Monday Mark Mahaney, a veteran technology analyst at RBC Capital Markets. “If the shares had remained low, we would have been a leak of employees”.
Weiner, who took the direction of LinkedIn in 2009, succeeding Reid Hoffman, the founder-has done an excellent job in recent years, lifting the company’s business, which basically tries to help people establish employment relationships and expand their social networks for business purposes. But despite the headlines about its growth and earnings, Linkedin is a business that has been losing money over the past two years.
But that’d never know if only we looked the press releases Linkedin . That’s because Linkedin directs the attention of investors to its adjusted Ebitda, its earnings outside the generally accepted principles. The company deliberately eliminates the cost of compensation based on stock price, which has the effect of turning losses into profits. Last year, Linkedin paid $ 510 million in stock-based compensation; in the last two years, these offsets represent a whopping 96 percent of operating income, equivalent to 16 percent of income, according to Mahaney. Other companies like Google, Amazon and Facebook, pay about 15 percent of operating income, which is considerably less than 10 revenue.
Linkedin justify this practice by saying that based compensation actions are “numeraries not by nature” and exclude them from its calculations of income provides “additional meaningful information about the operating performance and liquidity.”
But investors like Warren E. Buffett have criticized this practice much. “It has become very common for managers to owners tell them to ignore certain items of expenditure, which are very real,” Buffett said in its annual report published this year. Based compensation actions, he said, “is the most obvious example. The name itself says it all: ‘compensation’. If compensation is not an expense, what is it? And if real and recurring expenses have no place in the calculation of income, where devil is your place? “.
Buffett also criticized analysts who” play a role in this charade, repeating as parakeets false figures ‘profits’ that do not take into account the compensation, they give managers “.
in April, Facebook, which also made its investors will use earnings figures with adjusted Ebitda, which also exclude the cost of stock-based compensation, it announced that it would change its policy. “The stock-based compensation plays an important role in how to compensate our employees and, therefore, we consider a real expense for the company,” said David Wehner, CFO of Facebook.
Facebook’s decision to change its policy was seen as a hint for other companies, including Linkedin. Other companies like Amazon and Intel, also take into account based compensation as an expense.
It is hard to believe that Linkedin, had it not been for this agreement with Microsoft, would soon have begun to use the more realistic version of their profits and in so doing, it would have reported more losses. The company certainly deserves credit for having built a global network of 430 million users and have made known his name. But the absence of such a method of accounting, the horrible headlines have already brought down the stock price even more, with the morale of all employees whose income depends on it.
Mahaney, analyst RBC, stating that use both compensation for shares was a negative signal. “There are many ways to look at this issue, but our general tendency is that while less is dependent on the compensation actions, the higher the quality of profits and losses,” he wrote in an April report, referring to the statement income.
Linkedin, Twitter, Yahoo and Alibaba, which “have increased reliance on compensation for actions” also have results “relatively lower quality,” said Mahaney.
Other brokerage analysts noted that Microsoft, which includes compensation for shares in the calculation of their profits outside the generally accepted accounting practices, was right on Monday to say that the merged company would follow the practices of Microsoft. In other words, from now on, Linkedin employees no longer enjoy more graceful results because their compensation is not counted. (Although, as a unit of Microsoft, it is unclear whether its results even be broken down for analysis investors).
A spokesman Linkedin declined to comment, merely stating the observations made by Weiner in the memorandum sent to employees.
in that document, and in conversations with employees on Monday, Weiner said that the momentum of the agreement was not a matter of the action, but rather a broader trend that Hoffman , the founder of Linkedin and he observed late last year. The largest companies in Silicon Valley-Facebook, Google and a few others have taken off from the herd rising and gaining larger evaluations, which makes it difficult for small technology companies attract the best talent. Ultimately, they decided it would be better Linkedin competitive position if it is linked with Microsoft
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