The Big Picture of Google’s Biggest Acquisition Failure

Google, which derives most of its revenue from advertising, has been trying to strengthen other revenue streams in the past few years. As a result, its cloud business’s share of total revenue has grown from 3.7% in 2017 to 10.8% in 2023. It is one of the three largest players in the cloud market. However, with a share of 11%, it trails Amazon, whose AWS has 31%, and Microsoft, whose Azure has 25%, according to Synergy Research Group.

The acquisition of Wiz would help Google in two ways. It would give it an additional source of revenue. Wiz, which is just four years old, reported annual revenue of $350 million in 2023. It would also help Google’s cloud infrastructure business, as customers increasingly prefer to work with fewer vendors. According to Capgemini, three of the four organizations have already pursued vendor consolidation in 2022. That trend is only expected to get stronger.

Problems with monopoly

As vendor consolidation forced IT companies to acquire startups offering complementary products, governments responded through their anti-competitive agencies. When news first broke that Google was going to buy Wiz, questions arose about whether regulators would approve the deal. Google already faces two antitrust lawsuits: one accusing it of illegally monopolizing the ad tech market, the other of monopolizing the search engine market.

There has also been opposition to the merger. Last December, Bloomberg reported that merger enforcement activity in the U.S. was the highest in 2021-2022 (the most recent year for which data was available) since pre-merger antitrust reviews began in 1976, with the Federal Trade Commission filing 24 cases and the Justice Department filing 26. While the companies have won many of these cases, most notably Microsoft’s acquisition of Activision Blizzard, antitrust issues are widely discussed in M&A deals.

Output options

One reason the startup ecosystem was watching the Alphabet-Wiz deal with interest was the potential boost it could provide to M&A deals. According to a June report by consulting firm PwC, M&A deals fell 25% in the first half of 2024 compared with the year-ago period, with the downtrend starting in 2022. “The daunting combination of high interest rates, current valuations and political uncertainty has been a drag on many deals,” she said.

After Alphabet’s bid was rejected, CEO Wiz Assaf Rappaport said in a memo to company employees that he intended to pursue an IPO. IPOs, another key exit option for investors, have also been down over the past few quarters, both in the U.S. and globally. According to S&P Global, U.S. companies conducted 25 IPOs in the first quarter of 2024, down from 23 in the same period in 2023, but down significantly from 357 in the first quarter of 2021. The IPO market has been sluggish since 2021.

Possibility of using the cloud

Wiz’s confidence, despite a muted IPO market, comes from the health of the segment it serves—cloud security. It has grown to $100 million in annual recurring revenue in just two years since its founding and counts 25% of the Fortune 100 among its customers, a reason Alphabet was willing to pay a hefty premium over its previous valuation. Wiz can now anchor that to a better price.

That’s being fueled by demand for cloud security. According to Gartner, cloud security spending is outpacing other security products and services in 2022 and 2023 and is expected to do so again in 2024. That, in turn, is being fueled by growing cloud adoption. By 2028, cloud computing will go from a disruptor to a necessary part of keeping businesses competitive, Gartner said last year. At the same time, cybersecurity threats are growing. The decline in deals is a sign of the potential for the cloud security market.

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Also read: Cybersecurity: Microsoft’s Azure Issues and Google’s Acquisition Actions