It’s not often you see big tech firms getting pushed around. Upstart Wiz Inc. has just squeezed Google owner Alphabet Inc. to pony up $32 billion for a privately owned five-year-old cybersecurity firm. Even if the search giant can comfortably afford this deal, investors may need reassurance it hasn’t abandoned financial discipline in its pursuit of strategic ambitions in the cloud.
Alphabet tried and failed to acquire Wiz for $23 billion in July last year. At the time, Wiz’s founders told staff independence and a potential initial public offering were a better course. Securing a price around 40% higher in less than a year shows just how much Alphabet wants to own this asset.
Cybersecurity is a crowded field with no shortage of takeover targets. Why Wiz? One differentiator is that it’s focused on cloud computing from the get-go, its software helping corporations identify and triage the vulnerabilities in their cloud-based data.
For Alphabet, the strategic logic rests on edging out Microsoft Corp. and Amazon.com Inc. in corporate cloud services. But the financial logic of conceding so much on price in such a short space of time? That’s a leap of faith. Wiz is likely loss-making. Annual recurring revenue, largely from a blue-chip corporate customer base, will of course have grown. And Alphabet could lift this from the previously reported $500 million to $1 billion or more utilizing Alphabet’s reach, reckon analysts at Wedbush Securities. Even so, Alphabet would surely have factored near-term sales expansion and future synergy potential into its 2024 offer.
Moreover, Wiz’s standalone options don’t seem to have radically improved. Stock-market investors are cooling on the tech sector – the Nasdaq Composite has been on a rollercoaster since July and is down slightly on its level when takeover talks fizzled nearly eight months ago. As for the IPO market, again, recent volatility has likely made a stake sale to the capital markets harder, not easier.
What about the antitrust environment? The common wisdom is that deals will face less challenge from here on, especially in the US under President Donald Trump. Even the UK is reining in its trustbusters – it was previously an occasional lone crusader against deals other regulators tolerated. But again, it’s a bit soon to assume the risks of this deal being blocked are sufficiently diminished to make the acquisition more valuable to this or any big buyer. Indeed, a thumping $3.2 billion break-fee anticipates potential failure. Better to see the high price and goodies as making it easier for Wiz to live with the potential distraction of a lengthy antitrust probe.
The market’s judgement is understandably cautious. The total cost is small relative to Alphabet’s overall size. But it’s still the firm’s biggest ever acquisition. Alphabet’s market value had shed just over $60 billion, to a little under $2 trillion, in early trading Tuesday. Around half of that matches the fall in the Nasdaq. But that still leaves a sizeable hit possibly attributed to sticker-shock here, providing grounds for concern about generating decent returns on the outlay, and maybe more broadly about the risk of Alphabet doing further pricey M&A.
Alphabet’s management has some convincing to do. First, show regulators that owning Wiz won’t stifle innovation and choice in cloud security. Second, persuade shareholders that the alternative here – no deal – would have cost them even more in the long run.
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