What made cloud security company Wiz pull out of negotiations on a $23 billion acquisition by Google parent company Alphabet? It is assumed that there was no binding agreement between the parties, and that the talks were at a fairly early stage, otherwise, as a public company, Alphabet would have been obliged to notify the US Securities and Exchange Commission and the stock exchange. The assessment on the market is that the deal fell apart because of a combination of circumstances, among them fear of regulatory review that could take years, with growing regulatory scrutiny of acquisitions of technology companies.
Several large deals, such as the one for the acquisition of design platform Figma by Adobe for $20 billion, and the one for the acquisition of games company Activision Blizzard by Microsoft for $68.7 billion, have run into seious regulatory obstacles. The first deal fell through for that reason, while Microsoft had to undertake a prolonged legal process before obtaining the necessary approval.
Wiz, as a startup company, could not afford to wait a year or two years for such a review process to be completed, especially when the deal was with one of the giant technology companies, while Wiz is supposed to provide service to all. Wiz did not want to become a second Figma.
Besides that, Wiz came to the conclusion that the offer from Google and its valuation represented validation of the idea of a future flotation, and decided to take the risk of waiting for one, even though it had not prepared for it and was very far from being capable of embarking on one. The investors who supported a sale to Google had to accept the stance of the founders, who in any case control a majority of the voting rights, and therefore have the last word.
The offer from Alphabet (Google) was apparently the only one Wiz had received, and sources there have said in the past that the company is "too big to be acquired." Microsoft is not believed to be interested in buying Wiz, since it has a competing product, while Amazon and Nvidia, the two other cloud companies that could make a counter offer, don’t invest in data security products.
Adv. Ian Rostowsky, co-head of the Hi-Tech and Venture Capital Department at Amit, Pollak, Matalon & Co., cannot recall a similar instance. "It’s very rare that such a large deal between a technology giant and a startup is leaked to the press and then cancelled a week later. On the contrary, most deals that are reported earlier than expected are eventually completed," he says. "It may be that if the companies had signed a binding agreement, there would have been some regulatory difficulty, but there are many unknowns here, such as the size of Wiz’s market and how dominant it is in that market.
"In the minds of entrepreneurs who sell their company to a giant, there is always the fear of selling at a price lower than the company’s potential. Instagram, it will be recalled, was sold for just $1 billion, as was navigation app Waze, which today is on hundreds of millions of telephones. On the hand, the strong market breakthrough and the unlocking of the company’s true value sometimes happen thanks to the sale to the technology giant."
Adv. Roy Caner, head of the Hi Tech Department at EBN - Erdinast, Ben Nathan, Toledano & Co., says that in the course of negotiations on an acquisition deal there are many matters that can become the subject of dispute and cause the entire deal to run aground. "When the deal is reported in the media, in several instances in the past the regulators have made clear by indirect channels that they are liable to examine the deal in depth, which can cause a delay, and can even be an initial indication that they are not prepared to give approval," he says.
"When two companies reach the stage of a non-binding memorandum of understandings (or term sheet, A.G.), they move from general understandings to diving into the small details, commit to confidentiality, commit to not conducting negotiations with competitors, and start to carry out a due diligence examination. The founders then need to provide the potential buyers with all the financial and legal information that it requires.
"At this point, disputes can arise over financial terms such as ARR, a term with various definitions. This is not necessarily what happened with Wiz, but matters can arise that were not known to the buyer, such as a tax exposure, a leakage of intellectual property, legal claims, any one of which can upset the deal. And after a binding agreement is signed, the regulators and third parties such as customers can also scupper deals."
Published by Globes, Israel business news - en.globes.co.il - on July 24, 2024.
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