Google had both good and bad news last week. The good news was that its cloud division, which includes Google Workplace software-as-a-service and Google Cloud infrastructure services, made $10 billion in profits in a quarter for the first time, which should have cushioned the blow from missing out on a second $20 billion+ acquisition in less than a month.
The first failed acquisition was a long-rumored deal to acquire Boston-based CRM and marketing software company HubSpot. The price was never announced, but the company's market cap is around $30 billion, so you can do the math. The rumors began in April and continued for several months before finally dying down on July 10 when Bloomberg reported that the two companies were going their separate ways.
It didn't take long for rumors to surface that Google had its eye on Wizz, a hot cloud security startup valued at $12 billion. Google, which has never paid more than $12.5 billion for an acquisition, was reportedly offering $23 billion for Wizz, the largest deal ever proposed for a startup.
Why would a company walk away from such a huge deal (assuming the rumored numbers are anywhere near accurate?) In an email to Wiz employees, CEO Assaf Rapaport said he and his co-founders believe the deal could be even bigger and were willing to bet big on themselves.
“We are honored by the offer we received, but have chosen to continue on our path to building Wiz. Let's get down to business: our next milestones are $1B ARR and an IPO. It would be tough to turn down such an offer, but our talented team gives us the confidence to make that choice.”
There are plenty of reasons why a deal of this magnitude could fall apart — one source told TechCrunch shortly after the rumors broke that there was a 50% chance the deal would fall apart — so it's clear there were a lot of obstacles in the way from the get-go.
Constellation Research analyst Chirag Mehta offers three scenarios for why the deal fell through: Wiz thought it could get more than $23 billion before the IPO and tried to shop around, Google found something in its due diligence it didn't like, or the price was actually lower than the rumored $23 billion. “Wiz could have used this base price to generate M&A interest from other companies or to help with a potential exit in a future VC round,” Mehta told TechCrunch.
Whatever the reason, he believes Google needs to revamp its M&A division to match its size and financial strength. “To compete effectively and achieve its growth and revenue diversification goals, Google needs to revamp its M&A approach and overall operations. It's one of the largest companies in the world, but its M&A approach hasn't evolved proportionately to its size,” he said.
The regulatory environment may have also influenced the decision. “It's also important to keep in mind that the market environment is complex and many technology companies are taking a more strategic and cautious approach to acquisitions due to regulatory and financial constraints,” said Matthew Eastwood, an IDC analyst who covers Google. “That said, my belief is that Wiz's exit (rather than Google) is likely due to the company's belief that remaining independent (for now) could provide additional valuation growth.”
The companies could have spent a lot of time and effort waiting for regulators to make a decision on the deal, much like what happened with Figma, where Adobe's $20 billion acquisition offer ran into regulatory hurdles for over a year before the two companies eventually gave up and walked away.
But Eastwood said Wizz may have taken Google's offer as evidence that it would be better off remaining independent: “Wizz is a fast-growing hybrid cloud data security plan that would see a significant increase in market valuation if it could double its ARR organically (in my opinion, more than double).”
He may have a point: Wiz is the fastest startup in history to reach $100 million in ARR, hitting that mark just 18 months after launch. In May, the company reported ARR in the $350 million range. Now, ARR is around $500 million, a source familiar with the matter told TechCrunch.
The company plans to achieve $1 billion in ARR next year, the people said. If the $23 billion deal had been agreed upon, Wiz would have been valued at 46 times its current ARR and 23 times its projected ARR for 2025.
Wiz was founded at the very beginning of the pandemic in January 2020 and has been a huge success. The founders had previously run a successful security startup, Adallom, in 2012, which they sold to Microsoft three years later for approximately $300 million. After more than four years at Microsoft, the founders left the company to start Wiz.
The company has raised more than $1.9 billion since its founding, according to Crunchbase.
Whatever the reason the deal fell apart — whether it was Wiz or Google backing away — the fact remains that Google continues to struggle to close big deals, and while a strong cloud quarter and $40 billion run rate are certainly positives, the fact remains that M&A could help fuel growth.
Marina Temkin and Ingrid Lunden also contributed to this post.