does ChatGPT maker’s future lie in acquisition?

does ChatGPT maker’s future lie in acquisition?

Unlock the Editor’s Digest for free

By regulating artificial intelligence, the US government has given AI start-up OpenAI exactly what it asked for. This bolsters the company’s odds of securing an $86bn valuation. But a rivalry with Big Tech companies, including one of its own investors, could put a ceiling on future valuations. That could open the door to a sale.

When Microsoft extended its partnership with the ChatGPT chatbot creator this year, chief executive Satya Nadella described it as built around a shared ambition. However, the two companies are also competitors. Microsoft has an exclusive deal as OpenAI’s cloud partner, meaning customers can access OpenAI tools through its platform.

Microsoft offers a broad package of services. This will expand with the release of Microsoft 365 Copilot on Wednesday, which offers AI assistance across products such as Word and Excel for $30 a month per user.

At $86bn, OpenAI would be valued at 66 times reported annualised revenue. It is a 196 per cent jump since the last funding round, compared with a paltry 9 per cent increase in Microsoft’s share price over the same period.

Still, Microsoft could afford to purchase the company even at this elevated valuation. It is equal to about 3 per cent of Microsoft $2.5tn market cap. Microsoft’s total cash, cash equivalents and short-term investments amounted to almost $144bn in the last quarter. A large portion is earmarked for the delayed $75bn purchase of Activision Blizzard, but high free cash flow means it has the means to make deals.

Early investment and an exclusive partnership have put Microsoft ahead in the AI race. Buying OpenAI would ensure its position does not falter when the partnership ends. This does not mean a deal will go ahead. OpenAI may not want to sell. Regulators are unlikely to warm to the idea either. If generative AI takes off, they will be under pressure to ensure there is competition in the market.

Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.