An OpenAI Acquisition Turns Into a Google 'Hackqusition'...

In our current M&A environment in the AI space, there are but two types of deals: 'hackquisitions' and 'hackquihires'. At first, they seemed like they were the same deal – that is, a way to acquire a company without really acquiring it because, of course, the regulatory environment wouldn't allow for such a deal. Or, at the very least, it will likely be held up in review for a long time.

With a 'hackquisition', it was one company simply hiring some employees from another company and paying a licensing fee to that company for non-exclusive use of their technology, which sometimes may be interesting technology, but is never really the point. The point is to create a way to give compensation back to investors and other shareholders (including, often, employees) to ensure a deal – sorry, totally not a deal – gets done.

It's all a bit silly. It's a charade. But it seemingly works. As such deals keep happening. And actually, Meta has redefined such deals recently with their $14B+ 'hackquisition' of Scale AI. That deal, unlike the others, actually did see Meta taking a stake in the startup – a sizable one. Albeit 49%, the highest possible number without tripping Meta into being the majority shareholder. Which is obviously also not a coincidence. In fact, Meta learned from the best and originator of the 'hackqusition' model: Microsoft.

While their deal to 'hackquire' Inflection kicked off this type of M&A, it was really their deal to invest in OpenAI itself that in a way was the origination of such deals. In a normal world, Microsoft would have acquired OpenAI long ago, but again, they cannot. So instead they control them in ways that are... well, increasingly a problem for OpenAI! And while they don't technically have an equity ownership stake yet, that's only because they're blocking OpenAI from converting into a PBC to give them such a stake so that they can presumably get both better terms and assurances around the use of the technology that they've largely funded to date.

We all know that situation. But it's interesting to think that back when the Sam Altman coup happened in 2023, Satya Nadella and team had offers out to Altman and his team to join Microsoft. Again, this wouldn't have been an acquisition of OpenAI, it would have been hiring a bunch of talent from OpenAI. But such a deal ended up not being needed. Within days, Altman was back in charge of OpenAI and the special relationship between those two companies continued as it had been. But again, Microsoft clearly took the idea from that time to do the Inflection deal a few months later – a deal done in part to hedge against the risks with OpenAI that the coup made apparent. And that deal clearly pissed off Altman and team, starting a snowball of animosity down the hill between the two sides. Complicated! Fun!

Anyway, that preamble is mainly just a reminder of how we got here. Because again, now Meta and others are changing the game by extending the old 'hackquisition' model to make some of the other deals look almost like 'hackquihires' rather than true 'hackquisitions'. And they're extending it to even 'hackquire' VC firms now, it seems! And now we may have yet another new wrinkle...

Here's Hayden Field of The Verge:

OpenAI’s deal to buy Windsurf is off, and Google will instead hire Windsurf CEO Varun Mohan, cofounder Douglas Chen, and some of Windsurf’s R&D employees and bring them onto the Google DeepMind team, Google and Windsurf announced Friday.

Mohan and the Windsurf employees will focus on agentic coding efforts at Google DeepMind and work largely on Gemini. Google will not have any control over nor a stake in Windsurf, but it will take a non-exclusive license to some of Windsurf’s technology.

OpenAI was reported to be buying Windsurf, a "vibe coding" startup for $3B back in early May. But the deal never closed. Why? All reports in the past several weeks indicate that Microsoft was using it as a point of leverage over OpenAI in ongoing negotiations about their own deal(s) with the company (including, yes, ultimately the ability for OpenAI to become a PBC). Did OpenAI really need their permission to buy another company? Well no, but because of their previous deal, Microsoft technically had rights to any IP OpenAI owns – including, it seems, IP they acquired. OpenAI was trying to get a carve out for that IP, and Microsoft didn't want to grant it. Why? Again, partially, it seems, a point of leverage in other negotiations, but also because Microsoft has their own competing product in the space with GitHub Copilot! Why would Microsoft want to see OpenAI acquire a company that was trying to eat their own lunch?

But as multiple reports make clear, Windsurf was insisting on such separation of church and state as it were. They were already running into issues with Anthropic not wanting to give them access to their latest models because they were in the process of selling to OpenAI. The Microsoft bridge was apparently one too far – even if it seems like the other sides should care about that particular element more than the Windsurf team since they were getting paid $3B!

Well, they're not getting paid $3B any longer. With the exclusive negotiating window closed, Google swooped in with a more standard "hackquisition" offer. And really, more of a "hackquihire" to use the newer terminology. They are hiring the Windsurf co-founders and a few other folks on the team as Miles Kruppa, Natasha Mascarenhas, and Erin Woo report for The Information:

Google is paying $2.4 billion for an nonexclusive licensing fee that will pay for Windsurf’s technology and multiple years of compensation for Windsurf staff coming to the company, according to a person with direct knowledge. It will not take a stake in the company, Google said.

The proceeds will likely result in a return for at least some of the startup’s investors, said one person familiar with the deal. Employees at the company will also get cash from the deal, although it is unclear how much or on what terms, according to a different person.

Ah yes, the old "nonexclusive licensing fee". A fee which will somehow also manage to send money to Windsurf employees and investors, of course. That seems particularly important here given the $3B deal that just fell apart.

OpenAI's deal was weird in how standard it seemed to be. $3B (in either cash or stock or most likely some combination) to buy up all the equity in Windsurf's parent company – thus buying out the shares from employees and investors. An actual acquisition! Google didn't have to match that offer – and didn't – in part because they're not actually buying the company. Just the co-founders and a few others. But given that it's still a competitive market – Meta was apparently also talking to them, shocking, I know – and given the bad vibes this new deal would have in replacing the old better deal without some sort of nice arrangement for all involved, Google clearly had to pay the "hackquisition"/"hackquihire" price. Again, even though this is really a "hackquihire" to salvage a failed actual acquisition. A new twist!

This is all not a great look for OpenAI. Whereas the reports about the ongoing OpenAI/Microsoft negotiations are just that, reports, of going-ons behind-the-scenes which they can brush off or quasi-deny, this deal is a very outward-facing sign of Microsoft's level of control in the relationship. OpenAI had a deal to acquire another startup and Microsoft effectively killed it.

At the same time, you have to wonder if part of OpenAI isn't okay with the deal being killed. Beyond the aforementioned issue with Anthropic, Windsurf's main competitor, Cursor, seems to have most of the momentum in the market right now and keeps raising money (or getting offers to raise money) at ever-increasing sums. And the fact that Thrive Capital is both a key investor in OpenAI and Cursor seems... interesting, if nothing else.

At the same time to the same time, one also has to wonder if Windsurf isn't okay with this new deal on some level because Cursor keeps setting new price comps for such startups. That said, it's undoubtedly not great news for the company to be losing their co-founders here, but at least someone internal (their head of business) is stepping up to lead the company going forward, which is still said to be retaining "most of its roughly 250 employees," per The Information. Oh yes, and they're getting paid some percentage of Google's $2.4B for their troubles...

But back to OpenAI, one has to wonder if they're going to have even more M&A trouble going forward. At least until they're able to renegotiate with Microsoft – if they're able to renegotiate with Microsoft. Any deal seems like it could be at risk now, and it may just ice a bunch of would-be deals, such as OpenAI trying to be competitive with whatever deal of the moment Meta is trying to do to help them get back into the AI race. Yes, the io deal went through, but that's apparently only because Microsoft wasn't worried about competing in future AI hardware (which seems shortsighted perhaps if the space actually takes off/works?).

And so the best of times/worst of times continue for OpenAI. The past couple of weeks have been pretty rough though. This Windsurf deal falling apart (and the key talent going to rival Google). A delay in the "open" model roll-out. Grok 4 being released and being received well in the market and xAI apparently now raising at a $200B valuation. Even that io deal had its own issues (around IP) before it finally went through. Is Apple really going to go with Claude over ChatGPT to lobotomize Siri?! Meta is poaching their talent – I won't say "left and right" but certainly "left and center" at this point. (As is former CTO Mira Murati armed with a new $10B valuation.) Oh yes, and the company still doesn't have their path to their for-profit dreams with the PBC status still up in the air and veiled threats seemingly being thrown around between OpenAI and Microsoft.

It's... a lot. Even for "not a normal company". It's enough to make you wonder if it's perhaps time to become more of a normal company...