Why is Microsoft buying LinkedIn?

$26bn well spent, or a glaring sign of a tech bubble about to burst?

Microsoft recently announced its intention to splurge $26.2bn on social network LinkedIn. Is that evidence of sound commercial judgment, or madness?

On the face of it, it's the latter. LinkedIn, a social network for professionals, is actually only profitable with the aid of some accounting trickery - exclude the value of employees' stock-based compensation and last quarter it generated $99m in profit. Don't exclude that figure, however, and that profit slumps to a $46m loss.

But of course Microsoft didn't buy LinkedIn simply to leave it alone and hope it one day adds something to the bottom line. There are three significant benefits Microsoft is targeting here.

1. Data

LinkedIn comes with a large volume of incredibly useful data on its 433 million users. Obviously you get the basics - names, address, career histories - but crucially you also get access to the address books of all of those users.

A survey from storage firm Western Digital in 2015 found that on average most people value their personal data at around £3,200. On that basis, acquiring it via acquisition in this way is a bargain.

Data aggregators such as Acxiom have made fortunes by compiling vast databases of the majority of adults in the US and UK - and lots of other territories. Now Microsoft has bought its own database, and one which comes with a social network as an added extra.

2. Social graph

This is basically an extension of the first point, but represents more than just individuals' personal data. It's partly about connections between people, and their address books, and also about their connections and relationships to companies, groups and products.

Understanding who people know and what they like is of huge value if you want to sell them something - like an Office 365 subscription, for instance.

And those connections between people are valuable too.

Two years ago Facebook spent $18.4bn on Whatsapp, which equates to $42 per address book. Microsoft's latest acquisition is just over $60 per contact list, but it's got a targeted list of professionals - exactly the group CEO Satya Nadella wants to focus on.

3. Integration

Microsoft used to be about selling packaged software. Now it's about online services. And despite previous CEO Steve Ballmer's best efforts, Microsoft has roundly missed the mobile revolution, and isn't going to overtake Apple and Google in the consumer space any time soon.

Nadella, however, is refocusing on businesses, where his firm continues to find success. And this acquisition is an expression of that strategy. He explains it best himself, in an internal memo he sent round at the time of the announcement:

"This combination [of Microsoft and LinkedIn] will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you're trying to complete. As these experiences get more intelligent and delightful, the LinkedIn and Office 365 engagement will grow. And in turn, new opportunities will be created for monetization through individual and organization subscriptions and targeted advertising.

"The opportunity for Office 365 and Dynamics is just as profound," continued Nadella. "Over the past decade we have moved Office from a set of productivity tools to a cloud service across any platform and device. This deal is the next step forward for Office 365 and Dynamics as they connect to the world's largest and most valuable professional network. In essence, we can reinvent ways to make professionals more productive while at the same time reinventing selling, marketing and talent management business processes. I can't wait to see what our teams dream up when we can begin working together once the deal closes, which we expect will happen this calendar year."

So ultimately this is a play to increase sales of Microsoft's productivity software, a way of enhancing its CRM tool Dynamics, and a straight-up database purchase with a social network attached.

In the longer term we should expect to see LinkedIn profiles as the central way we're recognised by, and interact with, Microsoft products. The intelligence gleaned from that identity will drive news feeds, connection and job recommendations, with email and calendar functions fulfilled by a future version of LinkedIn.

So to finally answer the question: sound commercial judgment or madness? It's the former.