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  1. Home
  2. / Investing
  3. / Technology

Microsoft's $7.5 Billion GitHub Deal Could Be Followed By Additional Moves

As global software R&D keeps growing at a healthy clip, Microsoft appears eager to use both M&A and organic investments to strengthen its ties with developers.
By ERIC JHONSA
Jun 04, 2018 | 01:15 PM EDT
Stocks quotes in this article: MSFT, TEAM, RHT, AMZN, CRM, GOOGL

Microsoft (MSFT) is hungry to grow its cloud exposure and to make inroads with non-Windows developers. In the wake of tax reform it has a giant war chest to go acquisition-hunting with.

That gives reasons to think the software giant's $7.5 billion deal to buy GitHub could be followed by one or more additional moves to strengthen its competitive footing relative to Amazon (AMZN) Web Services (AWS), Alphabet's (GOOGL) Google Cloud Platform (GCP) and/or others.

Following multiple media reports about a deal, Microsoft confirmed on Monday morning it's acquiring GitHub, a privately held owner of a cloud-based platform that's widely used by both independent and enterprise developers to share, review and host software code. The deal's $7.5 billion purchase price is far above the $2 billion valuation GitHub received in a 2015 funding round. Microsoft is paying in stock, but will use "an incremental stock buyback" beyond its usual repurchases (which are substantial) to offset share dilution.

Markets don't seem bothered by the deal's lofty price: Microsoft is up fractionally in Monday trading, and has made new highs. Atlassian (TEAM) , whose popular Jira platform competes with some of GitHub's offerings, is down a little over 1%.

GitHub is monetized through several subscription plans, and claimed over $200 million in annualized recurring revenue (ARR) back in August 2017. Microsoft expects the deal to be slightly dilutive to EPS in fiscal 2019 (it ends in June 2019) and 2020, but accretive to non-GAAP operating income in fiscal 2020. It promises GitHub will be independently-run and continue to support platforms Microsoft competes with.

Not surprisingly, Microsoft, whose own developer teams have been actively using GitHub for years, talks up GitHub's ability to strengthen its developer ties. The company notes GitHub has over 28 million developers and 1.5 million companies on its platform -- many of them are using GitHub to handle open-source projects -- and promises the deal will help it "empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft's developer tools and services to new audiences."

However, this is far from Microsoft's first noteworthy move in recent years to bolster its ties with developers writing for non-Microsoft software platforms. Others include:

  • Buying Xamarin, a creator of popular iOS and Android developer tools, in 2016 for a reported price of $400 million to $500 million.
  • Partnering with long-time server OS rival Red Hat (RHT) to support both Red Hat's Linux distribution and its OpenShift platform for managing app containers (it relies on the popular Docker container platform) on Microsoft's Azure cloud platform. Recently, the partnership was expanded to include a jointly-managed OpenShift service running on Azure.
  • Open-sourcing its Visual Studio Code source-code editor, and making it available on Linux and macOS in addition to Windows.
  • Making its popular SQL Server database available for Linux.

In addition, Microsoft is less than a month removed from unveiling a slew of new tools and services for developers at its annual Build conference. Notably, these included a solution for linking Microsoft's Visual Studio App Center (a set of cloud-based tools for building, testing and deploying mobile and PC apps) with code repositories stored on GitHub.

Additional moves to integrate GitHub with Microsoft's expansive Visual Studio suite of developer tools seem likely. For example, Microsoft could make it easier for a developer team to rely on both its Visual Studio Team Services collaboration software and GitHub's offerings (there's some overlap), and allow its new Visual Studio IntelliCode service (it delivers AI-based code suggestions) to run on GitHub. Also look for Microsoft to make it easier to let GitHub users leverage the various tools, services and programming interfaces (APIs) that Azure provides to cloud developers.

Better GitHub-Azure integration, and stronger ties with cloud developers using GitHub, could help Azure narrow lead that Amazon.com (AMZN) still claims in software ecosystems, via its huge AWS Marketplace. It could also help Microsoft better compete with independent cloud app development (PaaS) platforms such as Salesforce.com's (CRM) Heroku.

However, it would likely be a mistake to simply view this deal through the lens of product synergies. As enterprise software spending continues growing much faster than IT spending in general, and as developers have a greater impact on shaping everything from IT operations to assembly-line processes to ad campaigns to car development, the addressable market for apps and services that help developers do their jobs will keep growing at a healthy clip.

Judging by CEO Satya Nadella's remarks about the deal, this trend had much to do with Microsoft's decision to buy GitHub. And it wouldn't be shocking if it led to additional deals for companies that run cloud-based platforms claiming heavy developer support.

Docker, which Microsoft reportedly offered up to $4 billion for in 2016, is one possibility. Cloudflare, a major provider of content-delivery and security services for websites and cloud apps, might be another.

Whether or not Microsoft makes such a move, the fact that it was willing to spend so much on GitHub says a lot about how important Azure and developer services are to its growth strategy. And the fact that Microsoft's shares are ticking higher following the deal says a lot about how much markets now trust the company's management to execute.

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Microsoft, Alphabet and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club .

TAGS: Investing | U.S. Equity | Technology | Jim Cramer | Mergers and Acquisitions | Stocks

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