Atlassian under pressure after Microsoft agrees to buy GitHub

Microsoft (MSFT) announced this morning that it has reached an agreement to acquire GitHub, a private company whose web-based hosting service for version control using git is mostly used for computer code. Commenting on the news, Evercore ISI analyst Kirk Materne called the move a "smart strategic deal." Voicing a similar opinion, his peer at Oppenheimer argued that the deal puts pressure on other siloed DevOps tool companies, with Atlassian (TEAM) being among the most affected as it has a competing SCM solution that ties closely to its collaboration/workflow platform. GITHUB ACQUISITION: Microsoft announced it has reached an agreement to acquire GitHub. Under the terms of the agreement, the former will acquire the latter for $7.5B in Microsoft stock. Subject to customary closing conditions and completion of regulatory review, the acquisition is expected to close by the end of the calendar year. "GitHub will retain its developer-first ethos and will operate independently to provide an open platform for all developers in all industries," Microsoft stated in its announcement confirming the deal. Upon closing, Microsoft expects GitHub's financials to be reported as part of the Intelligent Cloud segment. Microsoft expects the acquisition will be accretive to operating income in fiscal year 2020 on a non-GAAP basis, and to have minimal dilution of less than 1% to earnings per share in fiscal years 2019 and 2020 on a non-GAAP basis, based on the expected close time frame. An incremental share buyback, beyond Microsoft's recent historical quarterly pace, is expected to offset stock consideration paid within six months after closing. Microsoft will use a portion of the remaining $30B of its current share repurchase authorization for the purchase. 'SMART STRATEGIC DEAL': In a research note to investors this morning, Evercore ISI's Materne highlighted that GitHub is a key platform for most corporate software developers and said he sees Microsoft's purchase as a "smart strategic deal" to double down on developers. While the deal will be largely immaterial to Microsoft's bottom line, the analyst thinks the acquisition will give Microsoft, and Azure, an even more prominent position in the developer community. Further, Materne argued that GitHub provides Microsoft with additional credibility among open source developers and gives Microsoft an opportunity to cross sell additional services like Teams and Cosmo into the developer community. The analyst reiterated an Outperform rating and $120 price target on Microsoft shares. ATLASSIAN THE MOST AFFECTED: Also commenting on the news, Oppenheimer analyst Ittai Kidron told investors in a research note of his own that the move illustrates Microsoft's intentions to deepen its influence on the DevOps community, commitment to open source software, and efforts to deliver a seamless end-to-end application development life-cycle experience. Further, the analyst believes the deal solidifies Microsoft market position, puts pressure on other siloed DevOps tool companies, and can drive further consolidation. From his coverage, Kidron thinks Atlassian is the most affected as it has a competing software configuration management, or SCM, solution that ties closely to its collaboration/workflow platform. He expects Atlassian to consider acquisitions of application release automation and continuous configuration automation tools in response. PRICE ACTION: In late morning trading, shares of Microsoft have gained about 1% to $101.54, while Atlassian's stock has dropped about 1% to $63.34.

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