Microsoft $7.5 billion acquisition of GitHub


 

Overview of the deal

  • Acquirer: Microsoft Corp.

  • Target: GitHub Inc.

  • Estimated value: $7.5 bn

  • Announcement date: 04/06-18

  • Microsoft Corp. Advisor: Simpson Thacher & Bartlett LLP (Legal)

  • GitHub Inc. Advisors: Morgan Stanley, Fenwick & West LLP (Legal)


Microsoft launched CodePlex in 2006, a web-based collaborative software platform that allowed shared development of open-source code. It was shut down in 2017, when Microsoft saw how GitHub’s popularity was outclassing its own creation and driving it to failure. One of the GitHub’s edges over Codeplex was that it was designed as a social network, simplifying teams and communities’ work loads. This deal is portrayed as having the same rationale as Microsoft’s acquisition of LinkedIn, where the deal value was determined by the established online community network instead of the software itself.


The SCM market, as of today, sees few competitors trying to erode GitHub’s leading competitive advantages. The Australian software developer Atlassian, which started hosting Git in 2017, is valued at $14.8bn whereas Bitbucket, its subsidiary and direct GitHub’s competitor is gaining more and more traction (now at 5+ million users) thanks to being the only actor in the market hosting JIRA and Mercurial VCS services (project and source code managers).

“It’s like a big book publisher taking over the library, […] It’s also like having your parents move into your treehouse.” -Rob Sanfilippo, Directions Analyst

Company details (Microsoft Corporation)

Microsoft is an international technology company that develops computer software, hardware and consumer electronics. It is the owner of several large brands including Skype, Bing, Visual Studio, MSN and LinkedIn.


- Founded in 1975, headquartered in Redmond, Washington, U.S.

- CEO: Satya Nadella

- Number of employees: 124,000

- Market Cap: $758 bn - EV: $703 bn

- LTM Revenue: $90 bn - LTM EBITDA: $34.1 bn

- LTM EV/Revenue: 7.8x - LTM EV/EBITDA: 20.6x


Company details (GitHub Inc.)

GitHub Inc. is the largest host of source code in the world, boasting 28 million users and 85 million repositories. It provides services for version control using Git, used to track changes in computer files, source code management (SCM) and software development.


- Founded in 2008, headquartered in San Francisco, California, U.S.

- CEO: Nat Friedman

- Number of employees: 800

- 2017 Revenues: $200 m

- *Currently privately held, hence lack of financial information



Projections and assumptions

  • Short-term consequences

Microsoft share price rose in the first hours of trading on the announcement day, and more than 27% from the beginning of the year 2018, to $90.30 as of the end of July 2018. Investors reacted positively to the strategic purchase of GitHub, which has never turned a profit, and whose main source of revenues are monthly subscriptions - for which the price ranges from $7 to $21 per user month.


The $7.5 bn acquisition, under agreement terms, will be paid by exchanging Microsoft shares, using an incremental share repurchase program, going beyond its usual buybacks levels ($40 bn in 2016 and $3.8 bn in 2018). These shares are planned to be repurchases within six months from issuance. The company expects to have dilution to earnings per share down to less than 1% in both year 2019 and 2020.


The transaction, expected to end within the year 2018, is subject to regulatory approval in the US/EU and customary closing conditions, that if failed to met within the deal’s closing either party will be given the right to exit the deal. Microsoft VP Nat Friedman, will be appointed as the new GitHub CEO. The current CEO and co-founder of GitHub, Chris Wanstrath, will become a Microsoft technical fellow, who will report directly to EVP Scott Guthrie. Once the deal closes, GitHub will be part of Microsoft’s Intelligent Cloud unit, which has seen a 15% boost in revenues from 2017 fiscal year (from $27.41 bn to $32.22 bn), accounting for a third of the total 2018 fiscal year revenue of $110.36 bn.

  • Long-term upsides

GitHub chose a sale over an IPO, after raising $100m from Andreessen Horowitz and $250 mn from Sequoia Capital (who, in 2015, valued GitHub at $2 bn). This decision was made because GitHub wanted to surpass its competitors and acquire a customer base at the fastest pace it could, thus it saw Microsoft’s offer, which includes an unrivalled range of accessorial services that could permanently retain the majority of web developing businesses, as offering the infrastructure to achieve this goal.


Microsoft has a long history of successfully integrating new businesses and leveraging arising synergies, as it did with LinkedIn where it explored synergies around recruitment, online tutorials and