Landing GitHub Boostes Microsoft's Open-Source Prowess

 Microsoft (MSFT) announced on June 4 that it has entered into an agreement to purchase GitHub for $7.5 billion, financed entirely by Microsoft stock. While we have our concerns about Microsoft issuing undervalued equity to finance this transaction, we were heartened to hear that it expects to repurchase shares beyond its normal quarterly pace to fully offset the size of the GitHub deal within six months. Microsoft still has roughly $30 billion in authorized share repurchases to accommodate such action. 

GitHub is a community of 28 million software developers who contribute code to more than 85 million open-source software projects. Microsoft has been an avid proponent of GitHub for several years, rising to the top of the list in terms of code commitments to GitHub, and the companies have reportedly had on-and-off discussions about an acquisition for the past several years. Although this deal is roughly one fourth the size of Microsoft’s 2016 acquisition of LinkedIn, we suspect GitHub will provide unique opportunities for Microsoft Azure customers, helping support our 31% compound annual growth rate for the business over the next 10 years. 

Management expects GitHub to be accretive to adjusted operating income in fiscal 2020, while EPS dilution in fiscal 2019 and 2020 will be less than 1% on a non-GAAP basis. The deal is expected to close by the end of the calendar year, and Microsoft will seek regulatory approval from the U.S. and European Union. Regulatory scrutiny could be heightened in the wake of the implementation of General Data Protection Regulation, but we believe Microsoft’s maintenance of GitHub’s independent status will ultimately enable the deal’s completion. We are maintaining our wide moat rating and $122 fair value estimate, representing roughly 20% upside from current levels.

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