Microsoft (MSFT) and OpenAI are engaged in high-stakes negotiations to determine how Microsoft’s nearly $14 billion investment in OpenAI will translate into equity, according to an exclusive Wall Street Journal report. The tech giant and OpenAI are engaged in these negotiations as OpenAI transitions from a nonprofit to a for-profit company. OpenAI, the AI startup behind ChatGPT, is now valued at $157 billion.
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This transition has introduced some major challenges, including how to distribute equity after it becomes a for-profit company and what governance rights Microsoft will have. As the largest investor in OpenAI, Microsoft stands to gain a significant stake, potentially making OpenAI the second-most-valuable U.S. startup after SpaceX.
Both Companies Have Hired Banks to Smoothen the Transition
In order to resolve these problems, both companies have hired investment banks to advise on the negotiations, with the tech giant enlisting Morgan Stanley (MS) and OpenAI working with Goldman Sachs (GS). A major point in these discussions is how much influence Microsoft will have in the restructured company. This is because the transition of OpenAI converting into a for-profit entity is highly unusual.
Currently, Microsoft, other investors, and OpenAI employees own rights to future profits generated by OpenAI. The startup’s profits are distributed through a for-profit subsidiary controlled by its nonprofit board, with returns for investors and employees capped based on when they were issued their profit participation units.
Notably, Microsoft, which has invested $13.75 billion in OpenAi since 2019, made this investment when OpenAI’s valuation was much lower. There is also the crucial question of how much equity will go to OpenAI’s CEO, Sam Altman, and other employees.
Microsoft’s Stake in OpenAI May Attract Scrutiny
Adding to the complexity, Microsoft’s growing stake may attract scrutiny from antitrust regulators, who are already keeping a close eye on tech giants. Both companies already share a close technological relationship as Microsoft is OpenAI’s exclusive cloud provider and integrates its technology into the Copilot AI application. Additionally, both companies are expanding their own AI capabilities, with Altman exploring additional cloud providers.
In fact, today, Microsoft announced the rollout of AI “agents” from next month, that is, AI tools for businesses to carry out specific work tasks.
Is MSFT a Good Buy Right Now?
Analysts remain bullish about MSFT stock, with a Strong Buy consensus rating based on 26 Buys and three Holds. Over the past year, MSFT has surged by more than 20%, and the average MSFT price target of $503.38 implies an upside potential of 20.4% from current levels.
