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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 education. The Washington-based company will choose to apply the same strategy it successfully implemented with LinkedIn: preserving its developer-first ethos and principles while supporting its core business strategy. In this regard, Microsoft might leverage GitHub’s potential by building stronger links between its platform and Microsoft’s Azure platform, which provides cloud hosting, in addition to Microsoft’s broad array of software and collaboration products.

The deal gives Microsoft an unrivalled competitive edge, compared to Google Cloud and Amazon Web Services, to naturally lead the fast-expanding cloud computing market. One way to enhance its reputation among the developers community is for Microsoft to use GitHub to promote the company’s own developer tools, using its sales group to increase adoption by its most important business customers.

Risks and uncertainties

Mr Nadella has begun to shake the reputation that Ballmer, the previous Microsoft CEO, defined before him, turning the Redmond giant into an active long sighted player. Yet while Microsoft’s position on open source has improved over time (e.g. being a member of Linux Foundation, the new partnership with Canonical to bring its Ubuntu OS on Windows 10, or Nadella’s positive statements on open source code), many open source pioneers will look at the giant tech firm moves with distrust and attention. Open source software maintainers are already seeking alternatives and may leave GitHub’s platform. Microsoft is not seen as a neutral entity like GitHub, thus the acquisition threatens that valuable reputation.

Mr Nadella faces the upcoming challenge to reap the vast commercial opportunity that GitHub network offers, without deleting or even distorting the very driver that pushed developers to the platform in the first place. Microsoft’s CEO also pointed out that the company will sell its development tools and services to a new customer base, a opportunity which could bring Microsoft to a trillion dollar company.

Nat Friedman, the post-acquisition Git-Hub CEO, said he will be committed to integrating into GitHub, besides Azure Cloud Service, others tools such as Amazon Web Services and Google Cloud Platform, together with tools to help developers program for edge computing, mobile, cloud, and Internet of Things. Bringing competitors to Microsoft’s proprietary platform would finally affirm GitHub’s monopoly, resulting in the highest-value scenario possible arising from the deal. The alternative scenario sees Amazon Web Services and Google Cloud Platform striving for success basing the competition on innovation, faster accessorial services implementation and the integration of a wider spectrum of supported OSs and code languages.

“Most importantly, we recognize the responsibility we take on with this agreement, […] We are committed to being stewards of the GitHub community” -Satya Nadella, CEO Microsoft

© The MergerSight Group. 2018. All rights reserved.


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