Why Microsoft Bought GitHub for $7.5B, and What Developers Think

Since Satya Nadella took over as CEO of Microsoft in 2014, the company’s dedication to cloud computing and developer-focused software products has been palpable.

Nadella was executive vice president of Microsoft’s cloud and enterprise group before taking the helm of the entire business. And revenues for the company’s cloud computing services, such as Microsoft Azure, have been growing strongly since—Microsoft reported $27.4 billion in revenue for its Intelligent Cloud segment in 2017, up from $23.7 billion two years earlier. Azure, the cloud computing, storage, and development platform, reported revenue growth of 99 percent and 113 percent in each of the past two fiscal years.

So it makes perfect sense that Redmond, WA-based Microsoft [[NASDAQ: MSFT) has acquired GitHub, the code repository and open-source hub for developers, in a deal worth $7.5 billion in stock as it tries to further tap into the pool of people—software developers—who are impacting every aspect of its business. Microsoft’s stock traded at $101.68 as of 1:18 p.m. in New York Monday, up 2.9 percent from its close on May 31. Business Insider first reported the companies were in talks on Friday, June 1.

Microsoft takes on plenty of responsibility—a word Nadella used in a blog post announcing the acquisition—by taking on GitHub, a San Francisco-based business that allows developers to contribute and discover new code through its basis of an open-source framework. More than 28 million developers use GitHub as a repository, and the company wants to allow developers to ideate, collaborate on, and deploy their code to the cloud, Nadella wrote.

GitHub will remain open and will operate independently, Nadella said, with Nat Friedman, co-founder of mobile-app development startup Xamarin, which was acquired by Microsoft in 2016, leading the business as CEO. GitHub co-founder Chris Wanstrath is staying with Microsoft as a technical fellow focused on unnamed strategic software initiatives.

Since the deal was announced, another code repository, GitLab—along with tech blogs—reported the competing service has gained spikes in the use of its platform. It’s unlikely that developers will choose to leave GitHub just because Microsoft owns the service, in part because GitHub has successfully made itself a core part of the toolkit for every developer, according to Bill Boebel, CEO of Austin-based software-as-a-service company Pingboard. The big thing GitHub got right is the social collaboration element of software development, Boebel said.

“When interviewing developers, asking for their GitHub URL has become as common as asking for their resume, and probably even more important,” Boebel wrote in an e-mail to Xconomy. “Most companies use it as their private source code repository, but even if they don’t, every developer’s side project and open source contributions are on GitHub.”

Microsoft’s roots are in building a platform for building and running software, which this acquisition emphasizes, Boebel wrote. Microsoft has steadily embraced open-source development under Nadella’s leadership, according to Axios’s Ina Fried, and the company’s main goal has been to get developers to write code that can be housed in Azure.

“More than anything, Microsoft under its new leadership realizes there’s an entirely new way to build software these days. It’s built in the open using a variety of developer tools and cloud services,” Pat Matthews, general partner and founder of San Antonio seed investment firm Active Capital, wrote in an e-mail to Xconomy. “It is the opposite of how Microsoft got started and thrived for years.”

Under former CEO Steve Ballmer, the company’s executives were critical of open-source software platforms like GitHub, which appeared to threaten Microsoft’s business model, according to a report this morning by Bloomberg. But Nadella’s shift puts the company’s trajectory more in line with its origins, Bloomberg reported, when “Bill Gates and Paul Allen co-founded the company to give hobbyists a way to program a new micro-computer kit, the MITS Altair.”

Last year, Microsoft shut down its competitor to GitHub, an 11-year-old software sharing service known as CodePlex, noting that GitHub is the “de facto place for open source sharing and most open source projects have migrated there,” in a May 31, 2017, blog post announcing the news. Microsoft, too, had migrated to GitHub, the post said.

Today’s all-stock deal represents a long-term commitment between the two companies, Active Capital’s Matthews wrote in an e-mail to Xconomy. (Matthews and Boebel have a bit of perspective on a deal like this: They sold a company they co-founded, Webmail.us, to cloud computing giant Rackspace in 2007, in an all-stock acquisition that ended up being worth about $50 million, Matthews said previously. Active Capital is now an investor in Boebel’s Pingboard.)

“Microsoft definitely values GitHub, the team, the community they’ve built and I’m sure they structured the deal with the right long-term incentives,” Matthews wrote.

GitHub was valued at about $2 billion in 2015, when it raised a $250 million Series B round of funding from Sequoia Capital. The company raised $99.5 million in 2012 from Andreessen Horowitz and SV Angel.

David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at dholley@xconomy.com Follow @xconholley

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