Shares in Microsoft were down more than three per cent while LinkedIn shares rocketed nearly 50 per cent in pre-market trading.
In a memo to staff, Microsoft boss Satya Nadella said:
"This deal brings together the world’s leading professional cloud with the world’s leading professional network. I have been learning about LinkedIn for some time while also reflecting on how networks can truly differentiate cloud services. It’s clear to me that the LinkedIn team has grown a fantastic business and an impressive network of more than 433m professionals."
Microsoft will pay $196 per share, a near 50 per cent premium on Friday's closing price, in an all-cash deal. Microsoft will issue new debt to fund the deal, which is expected to close by the end of the year.
LinkedIn founder and chairman of the board Reid Hoffman, who owns an 11 per cent stake in the business and around 53 per cent of the voting power, said:
“Today is a re-founding moment for LinkedIn. I see incredible opportunity for our members and customers and look forward to supporting this new and combined business. I fully support this transaction and the Board’s decision to pursue it, and will vote my shares in accordance with their recommendation on it.”
The professional network, which is still loss making, will continue to be run as a separate company under current LinkedIn chief executive Jeff Weiner.
Watch Nadella and Weiner discuss the deal below.
Shares in LinkedIn are down from last year's all-time high of $272.96 and experienced their biggest ever sell-off in February after disappointing results and a downgrade from Morgan Stanley with a price target of $125, reduced from $190.
However, things have since been on the up with a more positive outlook in April.
Morgan Stanley advised on the deal for Microsoft and boutique firms Qatalyst Partners and Allen & Company for LinkedIn.
CCS Insight analyst Ben Wood said:
“This moves gives Microsoft access to the biggest professional social network at present. That’s a valuable asset that can be deeply integrated with a number of Microsoft assets such as Office 365, Exchange and Outlook. That said, Microsoft has stated that the company will continue to operate as an independent business so we’ll have to see how deeply the integration occurs.”
CCS's Nick McQuire added: "With Facebook and Google increasingly entering the enterprise market via their social and collaboration tools, and Salesforce becoming an increasing threat in the cloud CRM market, acquiring LinkedIn also helps Microsoft position against key and new competitors as well."
The deal is a logical one for Microsoft with its greater focus on the corporate rather than consumer world, but analysts noted the rather high price - equivalent to around $61 per LinkedIn user - was quite steep.
"Paying that kid of money is huge. And also remember it is still loss making," said Richard Holway, chairman of analyst firm TechMarketView, speaking to City A.M.. "There is good logic, but it will be difficult to justify that kind of price."
However, the deal comes under the watch of a more sensible boss compared to the disastrous acquisition of Nokia under Steve Ballmer, Holway notes, which was "to all intents and purposes a waste of money".
"What he's [Nadella] done is stick to what it's good at - productivity, Office, operating system - paring things back. He's a sensible guy, it's a sensible acquisition, the only thing I doubt is the price," he added.
The purchase could put at risk Microsoft's exclusive AAA rating, however, an accolade it shares with just two other companies - Johnson & Johnson and Exxon Mobil. Moody's has put the firm under review for downgrade following the deal.