They can embrace Linux, but they can't extend it in any meaningful way. By which I mean they can't ever create a Microsoft brand of packaged Linux. The Linux marketshare is already flooded with distros, and any software that earns revenue running on Linux runs on all the major distros more or less equally well. What could Microsoft create for which Microsoft Linux would be an option so compelling that companies would pay money to buy Microsoft Linux?
For example, MS could create a whole new graphical alternative to X and Wayland that works better than them both. Their challenge for capitalizing on that would be to create a software that works only somewhat well on X or Wayland, but works perfectly on MS Linux. I predict the Linux crowd will not use it. At best, they'll end up providing an alternative for the benefit of MS aficionados.
For example, MS could create a whole new graphical alternative to X and Wayland that works better than them both. Their challenge for capitalizing on that would be to create a software that works only somewhat well on X or Wayland, but works perfectly on MS Linux. I predict the Linux crowd will not use it. At best, they'll end up providing an alternative for the benefit of MS aficionados.