Microsoft has confirmed a multibillion-dollar investment in OpenAI which is the parent company of ChatGPT. The announcement comes days after the company announced that it would lay off 10,000 people.
While Microsoft did not specify the specific dollar amount, it said that it would be a “multiyear, multibillion dollar investment to accelerate AI breakthroughs to ensure these benefits are broadly shared with the world.” Semafor reported that the investment could be as high as $10 billion.
Microsoft said the agreement follows its previous investment in the company in 2019 and 2021. The deal was widely speculated as Microsoft sees it the partnership as a key strategic growth driver.
Commenting on the enhanced partnership, MSFT CEO Satya Nadella said, “In this next phase of our partnership, developers and organizations across industries will have access to the best AI infrastructure, models, and toolchain with Azure to build and run their applications.”
Previously there were reports that OpenAI is looking to sell shares in a tender offer that could value the company at $29 billion.
Here it is worth noting that a tender offer differs from a funding round. While in a funding round, startup companies raise funds from investors, a tender offer gives the exit route to existing investors and employees who hold ESOPs.
In 2021, OpenAI tendered shares in an open offer which valued the company at $14 billion.
No Funding Winter for ChatGPT while Many Startups Face Cash Crunch
There has been a funding winter for startup companies and many have shut down. This includes Argo AI which was backed by Ford and Volkswagen. Many others have resorted to mass layoffs amid pressure from investors to cut their losses.
Even if startup companies managed to raise funds it has been at a massive haircut. BNPL (buy now pay later) company Klarna for instance raised funds at an 85% haircut to its previous valuation.
Given the turmoil in public markets, valuations of private startup companies have also come down. TikTok-parent ByteDance’s valuation has also come down. ByteDance is however still the most valued startup company despite losing billions of dollars last year.
Many startup companies including Instacart and Kurly have delayed their IPO plans as the market has been cold to new listings, especially of richly valued tech startups. There is a list of some of the upcoming IPOs.
Coming back to Microsoft’s partnership with OpenAI, D.A. Davidson believes that Microsoft’s investment in OpenAI would help it challenge the dominance of Google. The brokerage initiated coverage on Microsoft with a buy rating and $270 target price. There is a guide on how to buy Microsoft stock.
Microsoft Announced That It Would Lay off 10,000 Employees
Recently, Microsoft announced that it would lay off 10,000 people which is around 5% of its workforce. The company would also take a $1.2 billion charge due to the restructuring.
While announcing the layoffs, Nadella said, “we will continue to invest in strategic areas for our future, meaning we are allocating both our capital and talent to areas of secular growth and long-term competitiveness for the company, while divesting in other areas.”
Meanwhile, MSFT is not the only tech company that has announced mass layoffs. Late last week, Alphabet also announced that it would lay off 12,000 employees, or 6% of its workforce. It is the biggest round of layoffs in the company’s history.
Notably, the job cut announcements from Alphabet, Microsoft, and Meta Platforms have a similar tone. These companies overhired between 2020 and 2022 anticipating that the high growth in the early days of the pandemic would continue.
That, as we know was not the case and Big Tech companies are witnessing a massive slowdown.
Microsoft to Release Earnings This Week
Tesla and Microsoft are the two key tech earnings this week. Around 80 S&P 500 constituents spread across diverse industries ranging from industrials, defense, airlines, tech, and pharma will release their earnings this week.
Talking of Microsoft, analysts forecast a low single-digit revenue growth for the company in the December quarter. We’ll get more updates on the OpenAI investment when MSFT releases its earnings.
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