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Why Microsoft's (MSFT) GitHub Acquisition Matters

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Microsoft (MSFT - Free Report) just announced that it plans to buy open-source software development platform giant, GitHub, for $7.5 billion in Microsoft stock. The deal further cements Microsoft’s commitment to its cloud-computing future as it aims to compete against the likes of Amazon (AMZN - Free Report) and fellow tech giants.

The Deal

Microsoft is set to buy GitHub, which is one of the world’s biggest software development platforms that boasts over 28 million developers around the world. Microsoft expects its newest acquisition to close by the end of the calendar year, once it completes all company and regulatory reviews. The tech powerhouse also said that it projects the acquisition will be accretive to non-GAAP operating income in fiscal 2020. Investors should note that Microsoft expects the acquisition will only dilute adjusted earnings by roughly 1% in fiscal years 2019 and 2020.

Started in 2007, GitHub allows companies and developers to “host and review code, manage projects, and build software.” The firm’s open-source approach, which is widely popular among software developers, allows people to study and learn from other people’s code and also modify, change, and redistribute the code for their own purposes.

GitHub currently boasts that over 1.8 million businesses and organizations use their open-source platform, which includes big-time names such as Spotify (SPOT - Free Report) , IBM (IBM - Free Report) , Google (GOOGL - Free Report) , Facebook (FB - Free Report) , Walmart (WMT - Free Report) , and many more. “We recognize the community responsibility we take on with this agreement and will do our best work to empower every developer to build, innovate and solve the world’s most pressing challenges,” Microsoft CEO Satya Nadella said in a statement.

The code repository giant was last valued at $2 billion in 2015. One of Microsoft’s VPs, Nat Friedman, is set to take over as GitHub CEO, while current CEO Chris Wanstrath will move into a new position as a technical fellow at Microsoft.

Nadella noted in a blog post Monday that Microsoft is the “most active organization on GitHub, with more than 2 million ‘commits,’ or updates, made to projects.” Microsoft’s CEO also stressed that GitHub’s widely popular open-source model won’t change going forward.

“Microsoft has been a developer-focused company from the very first product we created to the platforms and tools we offer today,” Nadella wrote. “Building technology so that others can build technology is core to our mission to empower every person and every organization on the planet to achieve more.”

Microsoft’s GitHub deal is one of its larger acquisitions and is the company’s biggest since it bought social networking giant LinkedIn for $26.2 billion in 2016.

Why It Matters

Microsoft made this multibillion-dollar deal to buy the open-source code-repository company because it wants to get back to its roots and also bolster its cloud-computing business even more. Earlier this year, the Redmond, Washington-based tech powerhouse announced that it will use the Linux operating system instead of its own Windows operating system for new security features for its Internet of Things business.

This also marks a big shift from Microsoft’s stance during the Steve Ballmer days, in which he called the free open-source operating system a "cancer" and the single largest threat to Windows. Today, Nadella and Microsoft have completely changed that stance and fully embraced the power of open-source.

Microsoft also committed to reorganize the company around its cloud-computing businesses and its Office business, instead of Windows. Last quarter, the company saw revenue figures of $26.82 billion, topping our Zacks Consensus Estimate of $25.71 billion. Furthermore, Microsoft’s Intelligent Cloud unit revenues, which contain its quickly growing Azure segment, climbed roughly 17% to reach $7.79 billion. Azure revenue alone soared 93%, after skyrocketing 98% last quarter.

Going forward, Microsoft hopes its GitHub acquisition will help carry the company into the future and encourage more developers to create services and apps that help make Azure more appealing to customers as it competes in the highly competitive cloud computing market against Amazon and others.

Shares of Microsoft opened higher on Monday following the news, and had popped 0.57% to $101.37 per share through morning trading.

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