Microsoft’s (MSFT) shares edged nearly 3% higher on Tuesday morning after the U.S. tech giant reached a new restructuring deal with OpenAI (PC:OPAIQ), including an agreement to take a $135 billion stake — or 27% — once the heavyweight AI startup becomes a public benefit corporation (PBC).
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As a PBC, OpenAI, which has been working under a capped-profit model that limits its ability to raise fresh capital, will be able to operate as a for-profit company that considers public benefits alongside shareholder interests. The transition can also help OpenAI attract new investors, including through a public offering.
The modified deal with Microsoft comes more than one month after both organizations reached a non-binding agreement allowing OpenAI to restructure as a for-profit entity. Microsoft has said that the new arrangement “preserves key elements” of their partnership.
Microsoft has been a key partner for OpenAI, with the American tech giant committing $1 billion in 2019 and another $10 billion in early 2023. OpenAI is eyeing a transition to a for-profit entity at a valuation of about $500 billion, according to media reports.
What Are the Terms of the Microsoft-OpenAI Deal?
Under the new deal, OpenAI, popularly known for its ChatGPT chatbot, has signed an agreement to purchase Microsoft’s Azure cloud services in increments, totaling $250 billion. This is even as Microsoft will continue to have exclusive intellectual property and Azure application programming interface (API) rights to OpenAI through 2032 until the latter develops artificial general intelligence (AGI).
AGI, unlike most current AI systems, means AI models will be able to understand, learn, and perform any intellectual task that a human can do. Current models are trained for specific tasks, limiting their capabilities.
Meanwhile, the new arrangement maintains the existing revenue-sharing agreements between Microsoft and OpenAI until an independent expert panel verifies an AGI developed by OpenAI. In addition, Microsoft said OpenAI can now provide API access to the U.S. government’s national security agencies, regardless of which cloud service they use.
End of Microsoft-OpenAI Tension?
The new deal comes after tension between Microsoft and OpenAI reached “boiling point,” with Microsoft rolling out its own in-house AI models to compete directly with OpenAI and reduce its reliance on the AI startup. Microsoft also recently partnered with Harvard and AI startup Anthropic (PC:ANTPQ), further fueling concerns that it is moving beyond OpenAI.
Meanwhile, a Wall Street Journal report noted that Microsoft’s disclosures about its OpenAI stake are “scant”. The report observed that the tech giant recorded OpenAI-related losses in a $4.7B “other, net” expense line in its most recently completed financial year, which ended on June 30th.
Is Microsoft a Buy, Sell, or Hold?
Turning to Wall Street, Microsoft’s shares currently have a Strong Buy consensus rating from analysts, according to TipRanks data. This is based on 33 Buy recommendations issued over the past three months.
Moreover, the average MSFT price target of $628.70 indicates about 15% growth potential from the current level.
