By Jay Greene
Updated June 4, 2018 3:11 p.m. ET
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Microsoft Corp. MSFT +0.48% agreed Monday to buy coding-collaboration site GitHub Inc. for $7.5 billion in stock, one of the biggest in a string of deals by Chief Executive Satya Nadella to transform the software giant beyond its legacy products and focus on fast-growing areas like cloud computing.
The deal values GitHub at nearly four times the $2 billion valuation given by private investors in a fundraising round three years ago. GitHub has grown into a major nexus for software developers to share and collaborate on code—it claims 28 million users. The 10-year-old company, which charges corporate customers, doesn’t disclose revenue or profit, and its financial performance isn’t clear.
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Heard on the Street: Microsoft’s GitHub Deal Is a Clean Break From Its Past
Acquiring GitHub could help Microsoft persuade more developers to create applications for its cloud-computing business, where customers rent digital resources and applications on demand. Microsoft is racing to catch up to industry leader Amazon.com Inc. in that business.
GitHub is particularly popular with open-source developers, a community whose members share code that can be changed and improved by others. Not long ago, Microsoft deemed such software the enemy. Mr. Nadella’s predecessor, Steve Ballmer, once called the open-source operating system Linux a cancer because of its threat to intellectual-property rights.
But since taking over in 2014, Mr. Nadella has shifted Microsoft’s open-source strategy, opening up its database program to work with Linux, for example, as he seeks to move past his company’s reliance on Windows. In March, the CEO reorganized the company around its growing Azure cloud-computing operations and its Office productivity business, downgrading the role of Windows.
“Our business strategy is to have an open platform and an open community,” Mr. Nadella said in an interview Monday.
The GitHub deal is Microsoft’s second biggest under Mr. Nadella, after its $27 billion purchase of LinkedIn Corp. in 2016. It is the fourth biggest in Microsoft’s history, including its purchase of Nokia Corp.’s phone business in 2014, which ultimately cost $9.4 billion, and its $8.5 billion acquisition of Skype SARL in 2011.
Microsoft said it would pay for GitHub entirely in stock, although the Redmond, Wash., company held $132.27 billion in cash and short-term investments as of the end of March, and paid cash for LinkedIn. Microsoft stock is up 42% in the past 12 months; it closed Monday at $101.67, up 0.87%.
Microsoft intends to increase its stock repurchasing to offset within six months the shares paid for GitHub, finance chief Amy Hood said during a conference call after the deal was announced.
That strategy should help the sellers defer the tax impact of the transaction, said Stifel Nicolaus & Co. analyst Brad Reback. Microsoft expects the GitHub deal to close by the end of the year.
GitHub’s largest investor is venture-capital firm Andreessen Horowitz, which invested $100 million in an early round and more money in later rounds. Its proceeds from the deal will total just more than $1 billion, according to people familiar with the investment.
Several companies expressed varying degrees of interest in acquiring GitHub over the years, including Alphabet Inc.’s Google and Amazon.com Inc., said a person familiar with GitHub. But there was no formal auction process, and Microsoft didn’t fend off other bidders to secure its deal, the person said. Representatives of Google and Amazon didn’t immediately respond to requests for comment.
GitHub likely won’t soon provide a significant financial boost to Microsoft; analysts expect it to report $109.54 billion in revenue for the current fiscal year.
GitHub’s developers work on code that sits in 85 million storage spaces, called repositories, according to Microsoft. It charges corporate customers to host and run software projects, a service that includes security and identity-management features.
But GitHub today makes little money, said the person familiar with the company. While GitHub offers a free version of its service to developers willing to share code, it began charging for private storage on the service six months after its launch.
In a blog post, Mr. Nadella said Microsoft plans to “accelerate enterprise developers’ use of GitHub” by selling the service through Microsoft’s sales channels. He also expects GitHub to bring Microsoft’s developer tools and services to new customers.
Mr. Nadella explained the price Microsoft is paying by pointing the boom in software development in recent years, noting that non-tech companies increasingly are hiring developers, and those companies often use GitHub. “A lot has happened since that last valuation round at GitHub,” he said in the interview.
Microsoft has long counted developers among its important constituents. The company became the dominant tech power in the 1990s in large measure because developers chose to build their applications for its Windows operating system.
Now Microsoft is playing catch-up in the cloud-infrastructure market to Amazon, which has its own loyal following of partners that build applications for the service. GitHub could lure developers to create services that help make Azure more appealing to customers.
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Microsoft made a similar, though far smaller, acquisition two years ago when it bought Xamarin Inc., which makes software tools to help developers who use Microsoft products build apps for Apple Inc.’s iOS and Google’s Android mobile operating systems. That deal allowed Microsoft to build a stronger presence on devices that don’t run Windows.
With Monday’s purchase, Xamarin founder Nat Friedman, now a Microsoft vice president, will become GitHub’s CEO.
Microsoft said developers on GitHub would continue to be able to use the programming languages, tools and operating systems of their choice, and will still be able to deploy their code on rival cloud services and devices.
Mr. Nadella’s emphasis on open source should help assuage developers on GitHub, said Jeffrey Hammond, vice president at market research firm Forrester Research Inc. But because of GitHub’s success, they also have little alternative for code collaboration and development among such a large community, he said. Atlassian Corp. said its competing Bitbucket service is used by “tens of thousands of customers.”
GitHub co-founder and CEO Chris Wanstrath will become a Microsoft technical fellow after the deal closes.
“When GitHub first launched ten years ago, I could have never imagined this headline,” Mr. Wanstrath said of the deal on Monday. “Git was a powerful but niche tool, clouds were just things in the sky, and Microsoft was a very different company.”
“Now, of course, things are different,” Mr. Wanstrath wrote in a blog post. “Git is far and away the most popular version control system, clouds are mostly computers, and Microsoft is the most active organization on GitHub in the world.”
—Rolfe Winkler
contributed to this article.
Corrections & Amplifications
Microsoft said it would acquire GitHub for $7.5 billion in stock. A summary for the story that appeared on WSJ.com erroneously said the acquisition was for $7.5 billion in cash. (June 4)
https://www.wsj.com/articles/microsoft- ... 1528118504
