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Jun 14, 2016

DealBook Today's Top Headlines - June 14, 2016: The Unspoken Reason Behind the LinkedIn Sale | Supreme Court Rejects Puerto Rico Law in Debt Restructuring Case | Libyan Fund Claims Goldman Sachs Exploited Its Financial Naïveté.

Tuesday, June 14, 2016
THE UNSPOKEN REASON BEHIND THE LINKEDIN SALE Microsoft's $26.2 billion cash deal to buy LinkedIn was by far the largest in its history, and its biggest bet on a shift from traditional software toward cloud computing, Nick Wingfield reports in DealBook.

The chief of Microsoft, Satya Nadella, has already improved his company's image by opening up to partnerships with once-bitter rivals like Salesforce, and he has accelerated the company's shift to cloud services. LinkedIn also caters to professionals, opening up the possibility of linking its network with Microsoft tools, and Microsoft is paying less than it would have done last fall when shares were trading at more than $260 a share. They closed at $131.08 on Friday.

Still, the value of the deal harks back to the heady heights of yesteryear's technology valuations, Michael J. de la Merced and Leslie Picker report in DealBook. It gives LinkedIn an enterprise value at 79 times its earnings before interest, taxes, depreciation and amortization for the 12 months that ended on March 31. By that measure, the transaction is more expensive than any big internet deal paid with cash, according to Bloomberg data.

Microsoft is paying $220 for each of LinkedIn's monthly users, compared with the $40 Facebook paid for each WhatsApp user two years ago. "Microsoft just paid on the assumption that we're going back to the multiples we had a year ago, but I don't think that's happening," said Max Wolff, the chief economist at Manhattan Venture partners.

LinkedIn will operate as an independent brand, in the same way as WhatsApp did after being acquired by Facebook. Jeff Weiner will continue as chief executive.

The attractions of the deal for LinkedIn are clear, in light of the struggling stock price. But the company is also heavily reliant on stock-based compensation, an issue that Mr. Weiner did not mention on Monday, Andrew Ross Sorkin writes in the DealBook column.

LinkedIn employees are paid largely in stock, and its shares plummeted more than 40 percent in February after a weaker-than-expected growth forecast. There have been persistent whispers about whether LinkedIn could retain its top talent as the marketplace clobbered their incomes, Mr. Sorkin writes.

However the company purposely strips out the cost of stock-based compensation from its earnings, turning losses into gains. Stock-based compensation represented 96 percent of operating income, or 16 percent of revenue, according to Mark Mahaney, a longtime technology analyst at RBC Capital Markets. Companies like Google, Amazon and Facebook paid out about 15 percent of operating income, or well under 10 percent of revenue. LinkedIn, Twitter, Yahoo and Alibaba, which "have the most dependence on stock-based compensation," also had results "of lower quality," Mr. Mahaney said.

LinkedIn has justified the practice by saying that stock-based compensation "is noncash in nature" and that excluding it provides "meaningful supplemental information regarding operational performance and liquidity." But investors like Warren E. Buffett have been highly critical. And Facebook, which used to do the same, changed its policy in April, saying that stock-based compensation played an important role in how it paid its employees and was therefore a "real expense for the business."

It is not hard to believe that LinkedIn would soon have had to use a more realistic version of its earnings and report more losses. Microsoft said that the combined company would follow Microsoft's practice of including stock-based compensation in earnings calculations.

As it was, LinkedIn's decision to sell suggested that the stand-alone outlook was not especially alluring, Robert Cyran writes in Breakingviews. And there are questions on Microsoft's side, too, Mr. Cyran writes. It had to write down the $9.5 billion it paid for Nokia and the $6.3 billion it paid for the aQuantive digital advertising agency.

These were deals sealed by Mr. Nadella's predecessor, Steven A. Ballmer, but it is hard to make these transactions pay off. Concrete indications of the deal's financial benefits are in worryingly short supply, Mr. Cyran notes.

There will be a windfall for the companies' advisers, though, Mr. de la Merced writes in DealBook.

Microsoft drew on two traditional advisers, Morgan Stanley, one of the top investment banks in Silicon Valley, and Simpson Thacher & Bartlett, a law firm that has long advised Microsoft on its transactions. LinkedIn was advised by the boutique firms Qatalyst and Allen & Company. LinkedIn has long been a client of Allen & Company, while Qatalyst, founded by the longtime deal maker Frank Quattrone, has long been a go-to for tech companies looking to sell themselves. Wilson Sonsini Goodrich & Rosati, which previously advised on the takeover of the online learning company Lynda, provided legal counsel to LinkedIn.
SUPREME COURT REJECTS PUERTO RICO LAW IN DEBT RESTRUCTURING CASE The Supreme Court on Monday rejected an effort to allow Puerto Rico's public utilities to restructure $20 billion in debt, striking down a 2014 Puerto Rico law, Adam Liptak and Mary Williams Walsh report in DealBook.

Justice Clarence Thomas, writing for the majority in the 5-to-2 decision, said the law was at odds with the federal bankruptcy code, which bars states and lower units of government from enacting their own versions of bankruptcy law.

Chapter 9, the part of the bankruptcy code for insolvent local governments, excludes Puerto Rico, so the island tried to enact its own version of a bankruptcy law in 2014. Officials argued that the so-called Recovery Act addressed a gap in the way Puerto Rico's debts were treated, but creditors challenged the act in federal court and the justices agreed.

In dissent, Justice Sonia Sotomayor and Justice Ruth Bader Ginsburg said that the majority's approach was too mechanical and failed to account for the purpose of the bankruptcy law and the impact of its decision. Justice Sotomayor wrote that the majority's approach ignored the crisis facing the utilities, which could imperil their ability to provide safe drinking water and maintain modes of transport.

The case has been vexing for all parties because when Congress amended the bankruptcy code to exclude Puerto Rico, in 1984, it left no written record explaining why. And it has barred the island from the only path to legally reducing debt over the objections of creditors.
ON THE AGENDA Data on retail sales in May will be published at 8:30 a.m. Mary Jo White, who leads the Securities and Exchange Commission, will testify before the Committee on Banking, Housing and Urban Affairs at 9 a.m. The Senate Committee on Finance will hold a hearing on energy tax policy at 10 a.m. James P. Gorman, the chief executive of Morgan Stanley, will speak at the bank's annual U.S. Financials Conference at 12:30 p.m.
LIBYAN FUND CLAIMS GOLDMAN SACHS EXPLOITED ITS FINANCIAL NAÏVETÉ Libya created a sovereign wealth fund in 2006, with the hope of emulating its Middle Eastern neighbours by investing the proceeds from its oil, Chad Bray reports in DealBook. It turned to Goldman Sachs, but the relationship soured after the Libyan Investment Authority said it was misled about a series of derivatives transactions and lost $1.2 billion.

It took Goldman Sachs to court and, when the trial began on Monday, claimed that the bank earned more than $200 million in "eye-watering" profit on the transactions. It claimed that it was an unsophisticated investor with staff that had little experience with investment banking and Goldman had preyed on this, persuading the fund to invest in complex transactions that it did not understand or desire.

Roger Masefield, a lawyer for the fund, argued that Goldman lured the fund into investments with training programs, gifts, overseas trips and internships for the brother of a staff member.

Goldman disputed the claims and said the Libyan Investment Authority had the financial sophistication to understand the disputed transactions.

The fund focused on the actions of Youssef Kabbaj, a former Goldman Sachs banker. The fund said that Mr. Kabbaj wined and dined fund employees on "training" trips to London, which included stays in stylish hotels and expensive meals at famous restaurants. He also bought presents and took staff members on vacation to Morocco, according to the court filings.

Mr. Masefield argued that Mr. Kabbaj worked on both sides of the derivatives transactions, "ghost writing" documents for staff members of the fund to be used to persuade its board to invest and then separately making presentations to the fund on behalf of Goldman Sachs.
FanDuel and DraftKings Said to Discuss Merger The two biggest daily fantasy sports companies, DraftKings and FanDuel, are in talks about a merger even as they fight legal challenges that threaten their businesses in the United States, Bloomberg reports, citing people familiar with the situation.
British Distributor of Electronic Component to Be Sold Premier Farnell, which makes the low-cost Raspberry Pi computer, will be bought by Daetwyler, the electronics distributor, for about $1 billion.
Berlin and Brussels Wary of Chinese Robotics Bid A bid by Midea, a Chinese appliance maker, for Kuka, the German robot maker, is facing increased political opposition in Berlin and Brussels because of fears that the deal will deliver some of Germany's most critical industrial knowledge into Chinese hands.
Chinese Companies Said to Consider Bids for McDonald's Franchise China National Chemical Corporation and New Hope Group are considering bids for McDonald's operations in China, Bloomberg reports, citing people with knowledge of the matter.
Iran in Talks Over Plan for Finance Hub Iran intends to set up a financial center in the free zone at Qeshm island and is in discussions with Chinese, Russian and Japanese banks about setting up offices in the area.

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