Microsoft emerges as clear winner from OpenAI turmoil with Altman on board

© Reuters. FILE PHOTO: Microsoft CEO Satya Nadella addresses a news conference in Berlin, Germany February 27, 2019. REUTERS/Fabrizio Bensch

By Aditya Soni

(Reuters) - Microsoft (NASDAQ:MSFT) emerged on Monday as the big winner of the upheaval at OpenAI, hiring ousted CEO Sam Altman and other key staff of the startup to avert a potential flight to rivals and help deepen its lead in the artificial intelligence race.

The turmoil at OpenAI since Friday had raised fears about the fallout for Microsoft, which has pumped in billions of dollars and uses the pioneer's technology for most of its AI offerings such as its Copilot AI assistant.

The move ensured "the golden child of AI" will stay with Microsoft, analysts said, as the company competes with Alphabet-owned Google (NASDAQ:GOOGL) to dominate the nascent industry.

Microsoft's shares rose as much as 2% to a record high before paring some of the gains. The company was on track to add nearly $30 billion to its market value at current levels. That was close to the valuation OpenAI commanded in its last fundraise.

Altman will lead a new research team at the software giant following his surprise ouster that shocked the tech industry. He will be joined by Greg Brockman, another OpenAI cofounder, as well as other researchers including Szymon Sidor.

"Microsoft has been able to turn a crisis into an opportunity with the hiring of Sam Altman and Greg Brockman," said Gil Luria, senior software analyst at D.A. Davidson.

"Assuming they will be able to hire many more from the OpenAI team, they will have taken over the key development path for artificial intelligence."

About 500 employees of the startup also threatened to leave unless the board stepped down and reinstated Altman, as well as Brockman, according to a letter reviewed by Reuters.

"Your actions have made it obvious that you are incapable of overseeing OpenAI," the employees said on Monday in the letter, adding, "Microsoft has assured us there are positions for all OpenAI employees at this new subsidiary should we choose to join."

Microsoft and OpenAI did not immediately respond to requests for comment on the letter.

Analysts said an employee exodus was expected due to concerns over governance and the potential impact on what was expected to be a share sale at an $86 billion valuation, potentially affecting staff payouts at OpenAI.

"The OpenAI for-profit subsidiary was about to conduct a secondary at a $80 billion+ valuation. These 'Profit Participation Units' were going to be worth $10 million+ for key employees. Suffice it to say this is not going to happen now," chip industry newsletter SemiAnalysis said.

At Microsoft, the Altman-led team will also likely have more access to the computing power necessary as the company is the second-biggest U.S. cloud player and has committed to spending billions to expand its datacenter capacity.

"If the team went down the startup path, they would have had to spend significant time rebuilding GPT-4. Instead, at Microsoft they will have access to much of the IP they require for future products," SemiAnalysis said.