Microsoft’s AI talent raid will test regulators and VCs

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Wary of aggressive regulators, tech dealmakers are getting creative. Microsoft’s decision to hire co-founders and staff of artificial intelligence start-up Inflection is not an acquisition, according to the companies. Let’s see if Washington agrees.

On the surface, the plan appears to skirt the Hart-Scott-Rodino Antitrust Improvements Act that requires companies to report pre-merger notifications for acquisitions. In addition to hiring staff, Microsoft is reported to be paying to license Inflection AI software but the deal is not exclusive. Inflection will remain an independent business, albeit a hollowed out one. It can keep licensing its technology and can even be acquired. 

The curious set up is still likely to attract regulator interest. If agencies are concerned that it will reduce competition in a potentially transformative area of technology, they can investigate.  

M&A deals that focus on employees are popular in tech, where start-ups are often asset light and talent heavy. “We buy companies to get excellent people,” said Meta chief executive Mark Zuckerberg in 2010.    

Appetite for acquisitions has changed since then. Regulators accused of feeble enforcement in the past are ready for action. This week, the US Department of Justice sued Apple, accusing it of having a monopoly in smartphones. Microsoft’s $13bn investment in AI start-up OpenAI is already being scrutinised by UK and US regulators. Big deals, including Adobe’s $20bn plan to buy Figma, have been scuppered. Tech M&A spending fell to a decade low last year, according to data from S&P Global.

Column chart of Total deal value ($bn) showing Tech M&A is down

That poses a problem for large companies that want to beef up their AI departments and AI start-ups hoping to be acquired.

Microsoft is in the market. OpenAI’s messy drama last year, in which the board summarily fired its chief executive, was a lesson in the dangers of outsourcing. Although Microsoft was instrumental in restoring order, it appears keen to build up in-house AI teams. Inflection co-founder Mustafa Suleyman, also a co-founder of AI lab DeepMind, will lead the company’s consumer AI business. 

Inflection investors are reported to be in line to receive up to 1.5 times their investment while retaining a stake in the business. This is not the stuff of venture capital dreams — though Reid Hoffman, Microsoft board member and Inflection co-founder, called it a good outcome.

If Microsoft’s acqui-hire is repeated elsewhere in big tech, then expect start-up investors to rebel. Replacing acquisitions with hires and leaving investors with modest returns for their risky bets would threaten the entire VC funding ecosystem.

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