Microsoft changes tack with GitHub purchase

The software giant once relied on keeping customers tied to its proprietary software. Now it has joined the open-source insurgency. Alice Gråhns reports.


Nadella: co-opting the open-source movement
(Image credit: 2016 Getty Images)

Software giant Microsoft once relied on keeping customers tied to its proprietary software. Now, with the purchase of GitHub, it has joined the open-source insurgency. Alice Grhns reports.

"Microsoft wants to be the hipster home for software developers," says Lex in the Financial Times. This week the technology giant announced that it was buying GitHub, an open-source code-sharing platform: programmers can upload software "to be used and improved by the wider community". GitHub boasts 28 million developers and generates revenue by selling subscriptions to its community. This acquisition reflects Microsoft's platforms-as-a-service (PaaS) strategy to help software makers come up with new apps. It's a route that Amazon and Alphabet, Google's parent company, are also taking. It comes on top of software-as-a-service (SaaS), whereby the giants offer cheap cloud-computing power for businesses. Microsoft is shelling out $7.5bn, which seems a lot for a firm with just $400m in annual sales. Still, Microsoft is worth $800bn, so it is hardly maxing out the credit card.

This isn't Microsoft's "largest or even most surprising deal to date", says Dan Gallagher in The Wall Street Journal. It is less than a third of what the company paid for LinkedIn two years ago, and has a closer fit with "Microsoft's core business than the parent company of the Minecraft video game, which was picked up in 2014 for $2.5bn". The cost is also lower than it appears at first glance because it is being financed with Microsoft's stock, which has become 40% more valuable in the past year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Embracing an old enemy

The tie-up is significant, however, says Gallagher, because it's "Microsoft's biggest bet to date on its new approach". Its main interest used to be "keeping customers tied to its own proprietary Windows software". But now that the computing world "has moved far beyond Windows PCs", the group has had to embrace open-source software. Under former bossSteve Ballmer, Microsoft cast itself as being in "a fight to the death" with such software, says Richard Waters in the Financial Times. Ballmer deemed it "a kind of anti-capitalist insurgency that threatened companies such as his that created commercial code". So until recently few would have anticipated a combination of the world's number-one software group and the biggest online store of open-source software. However, Satya Nadella, who became CEO in 2014, "has made it his mission to co-opt the open-source movement that GitHub supports".

Now that Microsoft no longer has much control over users' operating systems, notes Robert Cyran on Breakingviews, it is trying to profit from iPhones and Android-powered devices "by selling services to all". Buying GitHub extends Microsoft's reach. If Microsoft can gain the confidence of the GitHub geeks, and convince them to use its web-services business Azure, "then the money will have been well spent". Microsoft's market capitalisation has more than doubled under Nadella, suggesting that investors approve of its change of tack.

DS Smith wraps up Spanish rival

Videos of people unwrapping boxed products have a following on YouTube, says Lex in the FT. Now heaps of packaging are "generating a buzz for investors too". This week shares in DS Smith rose to a record high on news that the UK box manufacturer, Amazon's only UK packaging supplier, was paying €1.9bn for its Spanish rival Europac.

The deal isn't "particularly cheap", though. Europac's share price has more than doubled over the past year, so DS Smith is paying a multiple of ten times the past 12 months' earnings. Still, it should be able to make enough savings to justify the price. DS Smith will grow its presence in the Iberian market, where e-commerce sales are rising by 25% a year, says Carol Ryan on Breakingviews. Because online sales usually require six times more packaging than purchases in a shop, there should be healthy demand for its boxes.

This deal also addresses the group's long-standing habit of buying paper to construct boxes rather than making the paperitself. With e-commerce propelling the price of raw pulp higher, this has become increasingly costly. With online shopping on the rise, more consolidation in the sector is likely. And this bidder could actually become a target itself. The European packaging industry hasn't consolidated to the same extent as America's. And with fewer opportunities at home, US groups are eyeing the European market. Tennessee-based International Paper has twice bid for Ireland's Smurfit Kappa and been rebuffed. "DS Smith is its next-best option."

City talk

The UK's top rent-to-own retailer BrightHouse has long benefited from hire-purchase deals with a typical annual interest rate between 69.9% and 99%, says Lex in the FT. The Financial Conduct Authority (FCA) now says the charges are unfair and has proposed a cap on these rates. "It is hard to envisage BrightHouse easily weathering such a reform." It is already complaining that more stringent affordability tests and lending criteria are denting sales. In the first three quarters of 2017 the firm reported pre-tax losses of £29.7m, almost double the previous year's figure. It seems the group's business model is on borrowed time.

It's a "miracle" that Tim O'Toole lasted eight years as the boss of transport company FirstGroup, says Nils Pratley in The Guardian. The share price has fallen by more than two-thirds during his tenure. Given the latest results, his resignation "was inevitable". Recent events have included "scraps with activist investors" and, last month, an approach by private-equity group Apollo Global Management, which FirstGroup dismissed as "opportunistic". Saying no to Apollo was justified: "there should still be a decent business lurking within". However, it does "require the next boss to change a corporate mindset that the Unite union fairly condemned as managed decline' under O'Toole".

Virgin Brides, a wedding preparation service that went under in 2007, was a short-lived venture for Richard Branson, notes Jim Armitage in the Evening Standard. Virgin Money, on the other hand, has been more successful, and "now looks set to be the blushing bride for an Aussie suitor". However, "the dowry being offered by CYBG to Virgin shareholders is stingy". Virgin shareholders get 38% of the group compared with 36.5% under the first offer. Nonetheless, owing to the fall in CYBG's share price over the last month, its new offer is worth a little less than the first. Indeed, CYBG is still only paying 1.2 times book value for Virgin's assets. "A bid nearer 400p a share, up from today's 354p, would be the best way to get this well-matched couple to the altar."

Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.