It took some serious nerve for Wiz to walk away from Google’s $23B offer

Google had good news and bad news last week. The good news was that the cloud division — including Google Workplace software as a service and Google Cloud infrastructure services — made $10 billion for the quarter for the first time. That had to take the sting out of losing out on its second potential $20+ billion acquisition in less than a month.

The first failed acquisition was the long-rumored deal to buy Boston-based CRM and marketing software company HubSpot. We never got a price on that, but the company’s market cap is in the $30 billion range, so you do the math. That rumor started in April and persisted for several months before finally dying when Bloomberg reported on July 10 that the companies were going separate ways.

It didn’t take long for another rumor to surface that Google had turned its attention to Wiz, the hot cloud security startup with a $12 billion valuation. Google, a company that has never paid more than $12.5 billion for an acquisition, was reportedly offering $23 billion for Wiz, the most lucrative deal ever proposed for a startup.

Why would any company walk away from such an enormous deal (assuming the rumored number was close to accurate)? In an email to Wiz employees, CEO Assaf Rappaport said he and his co-founders believe it can be even bigger, and they were willing to place a big bet on themselves.

“While we are flattered by offers we have received, we have chosen to continue on our path to building Wiz. Let me cut to the chase: our next milestones are $1 billion in ARR and an IPO. Saying no to such humbling offers is tough, but with our exceptional team, I feel confident in making that choice.”

There are a lot of reasons a deal of this magnitude can break down. A source told TechCrunch right after the rumor broke that there was a 50% chance the deal would fall apart, so there were clearly many hurdles from the start.

Chirag Mehta, an analyst at Constellation Research, sees three possible scenarios as to why the deal failed: Wiz wanted to shop around before a possible IPO, believing it could get even more than the $23 billion; Google found something in due diligence it didn’t like; or the price was actually less than the rumored $23 billion. “Wiz could then use this baseline to create M&A interest from other players or even for future VC rounds leading up to a possible exit,” Mehta told TechCrunch.

Regardless of the reason, he thinks Google needs to overhaul its M&A unit to match its size and financial strength. “To compete effectively, and to meet their growth and revenue diversification goals, Google will have to overhaul their entire M&A approach and operations. They are one of the largest companies in the world, but their M&A approach has not evolved in proportion to their size,” he said.

The regulatory environment could have also contributed to the decision. “It’s also important to note that the market environment is complex with many tech firms adopting a more strategic and cautious acquisition approach due to regulatory and financial constraints,” said Matthew Eastwood, an analyst at IDC who follows Google. “That said, my belief is that Wiz likely pulled away (not Google) because they see additional potential to drive valuation by staying independent (for now).”

The companies could have spent significant time and effort waiting for regulators to make a decision on the deal, much like what happened to Figma when Adobe’s $20 billion offer was stuck in regulatory purgatory for over a year before the parties gave up and walked away.

But Eastwood says Wiz could also have seen Google’s offer as validation that it’s better off staying independent. “Wiz is a fast-growing hybrid cloud data security plan, and if they can double their ARR organically, their market valuation will rise significantly (more than doubling IMO).”

He might have a point. Wiz was the fastest startup to $100 million ARR ever, reaching that goal just 18 months after launch. In May, the company announced that its ARR was in the $350 million range. Today, the ARR is about $500 million, a source with knowledge of the matter told TechCrunch.

The company plans to hit ARR of $1 billion next year, the person said. If a deal had been agreed to at $23 billion, it would have valued Wiz at 46 times its current ARR and 23 times its projected 2025 ARR.

Wiz was founded on the cusp of the pandemic in January 2020 and took off like gangbusters. The founders had previous security startup success, founding Adallom in 2012 before selling it to Microsoft for roughly $300 million three years later. The founders stuck around, working at Microsoft for over four years before leaving to found Wiz.

It has raised over $1.9 billion since its founding, per Crunchbase.

Whatever the reason for the deal breaking down, whether it was Wiz or Google getting cold feet, the fact is that Google continues to have trouble closing big deals. While a good cloud quarter and a $40 billion run rate certainly helps, it doesn’t change the fact that M&A could possibly push that growth along faster.

Marina Temkin and Ingrid Lunden also contributed to this post.