Google had good news and bad news last week. The good news was that its cloud division — including Google Workplace as a Service and Google Cloud Infrastructure services — grew 100%. $10 billion per quarter For the first time. It was a palliative for missing out on a second potential $20 billion takeover in less than a month.
The first failed acquisition was the long-rumored deal to buy Boston-based customer relationship management and marketing software company HubSpot. We didn’t get a price for that deal, but the company has a market cap of around $30 billion, so you have to do the math. The rumor started in April and persisted for several months before finally dying down when Bloomberg reported on July 10 that the companies were go separate ways.
It didn’t take long for another rumor to surface that Google had turned its attention to Wiz, the popular cloud security startup. $12 billion valuationGoogle, which has never paid more than $12.5 billion for an acquisition, has reportedly offered $23 billion to buy Wiz, the most lucrative deal ever for a startup.
Why would any company back out of such a huge deal (assuming the alleged number was even close to accurate)? In an email to Wiz employees, CEO Asaf Rappaport said he and his co-founders believe it could be even bigger, and that they’re willing to bet big on themselves.
“While we are pleased with the offers we received, we have chosen to continue on our path to building Wiz. Let me put it briefly: Our next milestones are $1 billion in annual revenue and an IPO. Turning down such modest offers is difficult, but with our exceptional team, I feel confident in making that choice.”
There are many reasons why a deal of this magnitude could fail. A source told TechCrunch right after the rumor broke that there was a 50% chance the deal would fail, so there were a lot of obvious hurdles from the start.
Shirag Mehta, an analyst at Constellation Research, sees three possible scenarios for the deal to fall through: Waze wanted to research the market ahead of a potential IPO, thinking it could fetch more than $23 billion; Google found something in its due diligence that it didn’t like; or the price tag was lower than the rumored $23 billion. “Waze could use this as a basis to generate M&A interest from other players or even for future venture capital rounds that could lead to a potential exit,” Mehta told TechCrunch.
Regardless of the reason, he believes Google needs to overhaul its M&A unit to match its size and financial strength. “To compete effectively, achieve its growth goals and diversify revenue, Google will need to completely overhaul its approach and processes to M&A,” he said. “It’s one of the largest companies in the world, but its approach to M&A has not evolved to match its size.”
The regulatory environment may have played a role in this decision. “It’s also important to note that the market environment is complex, with many tech companies taking a more strategic and cautious approach to acquisitions due to regulatory and financial constraints,” said Matthew Eastwood, an IDC analyst who tracks Google. “However, my belief is that Waze probably pulled out (not Google) because it saw additional potential to drive valuation by remaining independent (for now).”
Companies could have spent a significant amount of time and effort waiting for regulators to decide on the deal, just as happened to Figma when Adobe’s $20 billion offer was stuck in regulatory purgatory for more than a year before the parties gave up and walked away.
But Eastwood says Wiz could also have seen Google’s offer as proof that it’s better off remaining independent. “Wiz is a fast-growing hybrid cloud data security platform, and if it can double its annual revenue organically, its market cap will skyrocket (more than double in my opinion).”
He may be right. Wiz was the fastest startup to hit $100 million in annual revenue, hitting the milestone just 18 months after launching. In May, the company announced it had $350 million in annual revenue. Today, it’s around $500 million in annual revenue, a source familiar with the matter told TechCrunch.
The company is planning to reach $1 billion in projected annual revenue next year, the source said. If a $23 billion deal had been agreed, Wiz would have been valued at 46 times its projected 2025 annual revenue and 23 times its projected 2025 annual revenue.
Wiz was founded at the start of the pandemic in January 2020, and has taken off at breakneck speed. The founders had previous success in the security space, founding Adallom in 2012 before selling it to Microsoft for about $300 million three years later. The founders worked at Microsoft for more than four years before leaving to found Wiz.
It has raised over $1.9 billion since its inception, Crunchbase.
Whatever the reason for the deal’s failure, whether it was Waze or Google’s decline, the fact is that Google is still struggling to close big deals. And while a good cloud quarter and $40 billion run rate certainly help, that doesn’t change the fact that M&A could drive that growth even faster.
Marina Temkin and Ingrid Lundin also contributed to this post.