Key Developments

  • OpenAI’s planned acquisition of Windsurf has been canceled.
  • Instead, Windsurf’s CEO Varun Mohan, cofounder Douglas Chen, and several key R&D staff are joining Google DeepMind to work on agentic coding projects, especially the Gemini model.
  • Google will not acquire Windsurf or take any ownership stake, but will obtain a non-exclusive license to some of Windsurf’s technology.
  • The arrangement is valued at $2.4 billion for the technology license and talent, but does not include an acquisition of the company itself.
  • This follows Windsurf’s earlier $3 billion acquisition talks with OpenAI, highlighting intense competition in the AI code-generation sector.
  • Earlier in June, Anthropic blocked Windsurf’s direct access to its Claude AI models, primarily due to OpenAI’s planned acquisition of Windsurf.
  • Finally, Cognition stepped in to acquire Windsurf’s remaining business, IP, and employees. Cognition is the company that makes Devin. source

“Reverse Acqui-Hire” Structure

  • Google’s deal is described as a “reverse acqui-hire”: hiring key talent and licensing technology, while leaving Windsurf independent.
  • This mirrors strategies by Microsoft, Amazon, and Meta, who have hired startup teams and licensed technology without full acquisitions—a practice that can avoid regulatory scrutiny and antitrust reviews.
  • The approach allows Google to secure top AI talent and technology without triggering regulatory alarms.

Industry Context and Competitive Dynamics

  • The move underscores tech giants’ aggressive efforts to secure leading AI talent and technology amid a rapidly evolving market.
  • The landscape has shifted since Windsurf’s initial acquisition talks, notably due to the rise of Claude Code (CC) by Anthropic:
    • Terminal CLI agents are far cheaper to develop than forking an entire IDE.
    • CC is easy to onboard, requiring only a simple extension for most IDEs.
    • Anthropic is willing to undercut API margins to gain subscription revenue and training data access.
  • Cursor/Windsurf’s main differentiators over VS Code + CC are:
    • A proprietary tab completion model.
    • UI features like “add selection to chat.”
  • There is skepticism about the sustainability of Cursor’s business model, given the rapid growth and potential decline in ARR (annual recurring revenue).

Market Pressures

  • Anthropic is offering CC at a significant loss, restricting access to some models for Windsurf, and increasing enterprise pricing for Cursor.
  • These changes forced Cursor to downgrade their plans, reflecting the intense pricing pressure and shifting market dynamics.
  • The future success of Cursor and similar UX wrappers may depend on the advancement of on-device or open source models, which could shift the competitive balance if model quality becomes commoditized.

Cognition Acquires Windsurf

Cognition will own Windsurf’s beloved product and strong business:

  • The Windsurf IDE, now with full access to the latest Claude models
  • Windsurf’s IP, including their trademark and the strong brand they have built
  • $82M of ARR and a fast-growing business, with enterprise ARR doubling quarter-over-quarter
  • A user base that includes 350+ enterprise customers and hundreds of thousands of daily active users
  • Windsurf team will continue to operate as they have been, and we will remain focused on our work of accelerating your engineering with Devin. Over the coming months, we’ll be investing heavily in integrating Windsurf’s capabilities and unique IP into Cognition’s products.

The deal price for Cognition’s acquisition of Windsurf has not been publicly disclosed.

IMO other than the Microsoft IP issue, I think the biggest thing that has shifted since this acquisition was first in the works is Claude Code has absolutely exploded. Forking an IDE and all the expense that comes with that feels like a waste of effort, considering the number of free/open source CLI agentic tools that are out there. Let’s review the current state of things:

  • Terminal CLI agents are several orders of magnitude less $$$ to develop than forking an entire IDE.
  • CC is dead simple to onboard (use whatever IDE you’re using now, with a simple extension for some UX improvements).
  • Anthropic is free to aggressively undercut their own API margins (and middlemen like Cursor) in exchange for more predictable subscription revenue + training data access. What does Cursor/Windsurf offer over VS Code + CC?
  • Tab completion model (Cursor’s remaining moat)
  • Some UI niceties like “add selection to chat”, and etc. Personally I think this is a harbinger of where things are going. Cursor was fastest to $900M ARR and IMO will be fastest back down again.

(by extr)

anthropic is offering CC at like a 500% loss, they restricted sonnet/opus 4 access to windsurf, and jacked up their enterprise deal to Cursor. The increase in price was so big that it forced cursor to make that disastrous downgrade to their plans.

(by adamoshadjivas)