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Weekly Wrap: How Microsoft Fares in LinkedIn Deal

We're maintaining a wide-moat rating for Microsoft with a $61 fair value estimate after the deal's announcement. Plus, low expectations on stock and bond returns from the Morningstar Investment Conference.

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Jeremy Glaser: Microsoft adds LinkedIn to its network; we get a sobering message at the Morningstar Investment Conference; and the Fed stands pat--this time on the Morningstar Weekly Wrap.

Microsoft made a $26.2 billion splash in the M&A market this week by agreeing to buy LinkedIn.  Rodney Nelson, our Microsoft analyst, thinks that this has long-term potential for Microsoft and sees the shares as undervalued today.

Rodney Nelson: Earlier this week, Microsoft acquired LinkedIn for $26.2 billion.  It was the firm’s largest acquisition to date.  In our view the acquisition is neutral to Microsoft currently as the business stands as a standalone entity. However, in the long run we think there are a lot of upside potentials for Microsoft in terms of integrating LinkedIn into a lot of its existing applications.  For example, we think there are a lot of use cases in Office 365, Dynamics, and Azure from a development standpoint, that Microsoft can leverage LinkedIn data to build a lot of powerful applications around human capital management, recruiting, and sales force management.

We have retained our wide-moat rating and $61 fair value estimate for Microsoft after incorporating our expectations for the LinkedIn acquisition.  Looking where the stock is trading today, we see sizable upside in Microsoft shares as they are trading around $50 per share relative to our $61 fair value estimate.

Glaser: The Morningstar Investment Conference was held this week. Our Russ Kinnel thought there was some sobering news for investors given how low expectations are for stock and bond returns.

Russ Kinnel: Among the themes that really emerged in the conference was a lack of enthusiasm for bonds and stocks in general.  Both those markets have rallied a fair amount and we’re not hearing a lot of enthusiasm.  I think the bond managers are the least enthusiastic.  We heard Bill McNabb of Vanguard say expect maybe 2% return over the next 10 years--that’s pretty grim.  The equity side wasn’t much better. Only the emerging-markets folks were enthusiastic, so it was a definitely a sobering message across the board at the conference this year.

Glaser: Another hot topic of conversation at the conference was the emerging threat of inflation and how the Fed was going to react to that.  This week they didn’t raise rates--which was broadly expected after May’s dismal jobs report--but there’s still this tension of what the Fed will do if inflation begins to rise where growth hasn’t really taken off, how are they going to handle that.

And be sure to check out our full coverage of the Morningstar Investment Conference, including interviews with Vanguard CEO Bill McNabb, Franklin Templeton’s Michael Hasenstab, and Research Affiliates’ Rob Arnott.

Jeremy Glaser has a position in the following securities mentioned above: MSFT. Find out about Morningstar’s editorial policies.