The collapse of a record-breaking deal has Wall Street analysts talking about the strength of the cloud security market.
Executives at startup Wiz Inc. recently chose to pursue an IPO over continuing talks with Google LLC parent Alphabet Inc. for a deal that reportedly would have valued Wiz at $23 billion. At that price, it would have been the largest cybersecurity deal ever recorded in the S&P Global Market Intelligence 451 Research M&A KnowledgeBase. Even with the deal called off, a monster IPO looms for the booming cybersecurity market.
"This deal highlights the critical role that AI-driven cybersecurity will play in the future of tech and cloud services, pushing major players to continuously evolve and invest in cutting-edge security solutions to protect their users and data," said Philip Alberstat, managing director of Embarc Advisors. "It's statement about the critical importance of cloud security in our digital future."
What gives, Wiz?
The neutral architecture of Wiz's software enables it to run on different hardware architectures without modification, a flexibility that can make it an attractive complement to a hyperscaler, such as Amazon.com Inc.'s Amazon Web Services, Microsoft Azure or Google Cloud Platform.
On the other hand, not being bound to a single hyperscaler gives Wiz more freedom to grow, said Brad Haller, a senior partner at West Monroe's M&A practice.
"Their ability to be creative and innovative would be limited to some extent, just given the sheer size and bureaucracy of a company like Google," Haller said.
The agentless cloud security system Wiz uses allows it to collect data using cloud provider application programming interfaces and metadata, making it easy to deploy, said Scott Crawford, cybersecurity industry analyst and research director with 451 Research.
Wiz raised $1 billion in a May funding round led by Andreessen Horowitz, Lightspeed Venture Partners and Thrive Capital, bringing its valuation to $12 billion.
The startup's momentum has snowballed such that it could even pursue an acquisitive approach to bolster its own cybersecurity offerings, said Mark Ehr, principal research analyst at 451 Research.
"They're a darling right now; they're gathering market share every day," Ehr said.
Deal or no deal, Wiz's ability to command such a high price tag has implications for its planned IPO and the broader cybersecurity market, industry experts said.
"We have yet to reach the full maturity of cloud security," Sysdig Inc. CEO Suresh Vasudevan said. "AI and cloud are converging faster than companies moving to the cloud can keep up. It is fair to say cloud-native cybersecurity will be the hottest market for years to come."
Google's next play
Analysts noted that Google, in particular, could be on the hunt for another acquisition target in the wake of the failed Wiz deal.
"While Wiz is off the table for now, this could start an M&A cycle as large cloud and tech stalwarts look to acquire cyber security software within their broader product portfolio," Wedbush analysts said in a note. "We believe consolidation is overdue."
Google's cloud capabilities have lagged Amazon and Microsoft and remain an area of emphasis for the company. Flush with record levels of cash reserves and amid mounting pressure from shareholders, an acquisition could be a good way for Google to garner more market share.
Orca Security Ltd., another Israeli cybersecurity startup currently pursuing a lawsuit alleging patent infringement against Wiz, could be a Google target, Ehr said.
A major question, however, is whether regulators would allow Google to make a large acquisition.
The company is squarely in the sights of regulators due to its dominance in the online search and digital advertising markets. Many expected an Alphabet-Wiz deal to face scrutiny from the Federal Trade Commission and the US Justice Department, regardless of the result of the US presidential election in November.
"In the current regulatory climate, both agencies have become increasingly vigilant about scrutinizing large tech acquisitions to prevent anti-competitive practices," Embarc's Alberstat said. "The FTC has been very clear that vertical mergers can, in certain instances, increase barriers to entry even more, raising costs and reducing innovation and quality for consumers. The FTC has generally taken the position that the greater the market share of the companies that are vertically integrating, the greater the probability that downstream customers will be injured."
Still, some believe that Google could make a case to the FTC that the company needs to offer a service comparable to Wiz or another cybersecurity provider's offerings to remain competitive. The need for more diversity among IT and security vendors has never been clearer after the July 19 CrowdStrike Holdings Inc. outage that impacted millions of Windows devices, grounding planes and hobbling IT systems.
"Google will say 'we need to be able to provide this is an offering and we're choosing to buy it, versus to build it ourselves,'" Haller said. "The only thing preventing them from building this themselves is time and resources. And they're actually going to pay more to go buy it rather than build it themselves. But it's about speed to market."
