It was too good to happen. After a turbulent period of just over a week in which 1,200 employees, four founders, and more than nine million Israeli citizens received a light dose of escapism and thought that, any minute, hundreds of new millionaires and a few billionaires would be minted here, and the fiscal deficit would be covered, reality gave us all a cold shower. Wiz’s founders - CEO Assaf Rappaport, Yinon Costica, Ami Luttwak and Roy Reznik - have announced that the proposed $23 billion acquisition by Google parent company Alphabet will not take place, because, they say, they have decided to go for an IPO.
1. The workers’ dream
First and foremost, this is a blow to the morale of the company’s 1,200 employees, a quarter of whom are based in Israel, who dreamed of an exit. Many of them were imagining the apartments they would buy and the vacations they would take. The fact that they will now have to wait for an IPO that, if it happens at all, is liable to take place only in two years’ time, must come as some kind of disappointment. There is no certainty that market conditions will permit an IPO then, and the main equities indices in New York are already teetering. It amounts to turning down a bird in the hand in favor of two in the bush.
2. What happened in the talks with Google?
There are more unknowns than knowns about the negotiations on the acquisition of Wiz. The few details that have been released to the public create a picture that arouses envy, but not enough to judge what happened in the past week and a half. In fact, beyond the fact that Wiz was in talks on an acquisition by Google for the huge sum of $23 billion, the whole market, with all its experts, knew nothing. Are other negotiations going on? Did the negotiations continue after the announcement? Did Wiz reveal to Google everything it could or was required to reveal? It can be presumed with a fair degree of certainty that Rappaport did not get up one morning with sudden feelings of doubt and decided to cancel the deal and aim for a flotation.
To start negotiations on a $23 billion acquisition with one of the world’s biggest technology companies requires initial contacts, a letter of intent subject to due diligence, a to and fro of questions and answers, and ultimately the disclosure of the company’s code to the buyer. At the same time, lawyers work on drafting the agreement, there is usually a "no shop" clause forbidding parallel negotiations with other potential buyers, and sometimes a penalty for leaking information. To say no after all that requires a genuine reason, and so far it has not been revealed. If Rappaport and his friends were solely aiming at an IPO, they would have refused Google at the beginning, and not started the prolonged negotiation process.
3. The investors
As soon as the deal was reported, questions started to be asked. What would the four founders do at Google? Would Google be capable of getting the best out of Wiz? Google has an excellent reputation for acquisitions. Several of the large companies it has acquired have become cash cows, among them YouTube, DoubleClick, and Android, while DeepMind now leads its artificial intelligence effort, but the danger to the integrity of Wiz as a startup with Israeli characteristics was too great.
The fact that the four Wiz founders together own 38% of the shares would not appear to give them complete control, but in practice the foursome holds most of the voting rights in the company, and they make the decisions. So although some of the most experienced and sharpest investors in the world, such as Marc Andreessen and Doug Leone, are invested in Wiz, pressure by investors to sell the company is not a main factor in its behavior. Andreessen would have been very happy to see a 100% return in record time on the huge financing round he led in May, but if the four Israelis came to the conclusion that Google wasn’t the right option, even after the start of negotiations, exchanges of documents, the involvement of teams of lawyers and accountants, and the leak of news of the deal to the media, the decision was theirs alone.
4. The reporting of the deal
The saying that all publicity is good publicity also applies to the ending of the negotiations between Google and Wiz. All the parties benefitted from the publicity. For more than a week, Wiz starred in the business press headlines, and Google was perceived as a company prepared to pay a lot to become a main player in cybersecurity. The ending of the negotiations, and Wiz’s declared drive towards a flotation, is not the end of the story. As mentioned, a flotation is liable to take two years, and many opportunities could crop up along the way.
5. The four founders
The media reports about "the entrepreneur who rents an apartment in Tel Aviv" stressed Rappaport’s modesty, but in actual fact the four founders of Wiz do not live from hand to mouth. They are described as paper billionaires by "Forbes". They may not have sold shares in Wiz in secondary rounds in order to accumulate wealth even before an exit, but the sale of Adallom for $320 million by three of them in 2015 was enough to reduce the personal pressure to make an exit. Rappaport wouldn’t really need a mortgage to buy a home, and Luttwak isn’t short of cash.
In other, smaller and less well publicized companies, the investors create modest secondary rounds, in which the founders sell them some of their shares. This helps to reduce pressure on the founders, who may have mortgages or high living expenses, and to avoid selling the company too early, although the founders will take care not to shower the founders with too much cash and thereby reduce their motivation to get up in the morning and go to work. The amounts are normally a few hundred thousand dollars, sometimes a million, over the life of the company.
6. The CFO dilemma
For months, Wiz has broadcast confidence in its growth rate, in its ability to reach the fantastic annual recurring revenue figure of $1 billion next year, and in its plans for an IPO in the long term. This is an impressive program, and if there’s an Israeli company capable of realizing it, it’s Wiz. But if Wiz was serious about an IPO, it needed to have a top flight CFO on board from the start.
Smaller and less rapidly growing companies than Wiz would have recruited an experienced CFO at an earlier stage, someone who had seen an IPO or two on Nasdaq and who had managed a company with revenue of hundreds of millions of dollars. At present, Wiz has a well-qualified Israeli as VP Finance, but if it is looking to go for an IPO in a couple of years’ time, in needs to hire a very high-profile CFO immediately.
In fact, it would have been appropriate to do so at the time of its $1 billion financing round in May. Wiz is still a loss-making company. Its annual loss is estimated at $120 million on annual recurring revenue of $500 million, and revenue on an accounting basis lower than that. To start a drive towards an IPO, it will need a lot more than that.
Published by Globes, Israel business news - en.globes.co.il - on July 23, 2024.
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