Regulatory risk thought factor in Wiz deal cancellation

But what prompted cloud security company Waze to pull out of negotiations to acquire the company for $23 billion by Alphabet, Google’s parent company? Presumably, there was no binding agreement between the two parties, and the talks were at a fairly early stage, otherwise Alphabet, as a public company, would have had to notify the SEC and the stock market. Market speculation suggests that the deal fell through due to a combination of circumstances, including fears of a regulatory review that could take years, given the increasing scrutiny of tech acquisitions.

Several major deals, such as Adobe’s $20 billion acquisition of design platform Figma and Microsoft’s $68.7 billion acquisition of gaming company Activision Blizzard, have faced serious regulatory hurdles. The former fell through for this reason, while Microsoft had to go through a lengthy legal process before getting approval.

As a startup, Wiz couldn’t afford to wait a year or two for this review process to be completed, especially since the deal was with a tech giant, while Wiz was supposed to be a service for everyone. Wiz didn’t want to become another Figma.

Moreover, Waze concluded that Google’s offer and valuation were an admission of a future public offering, and decided to take the risk of waiting until that happened, even though it was not ready for it and was far from capable of proceeding with such an offering. The investors who supported the sale to Google had to accept the position of the founders, who in any case controlled the majority of voting rights and therefore had the final say.

Alphabet’s (Google) offer appears to be the only one Wiz has 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, as it has a competing product, while Amazon and Nvidia, the other two cloud computing companies that could counter-offer, are not investing in data security products.

Attorney Ian Rostovsky, co-head of the high-tech and venture capital practice at Amit Pollack Matalon & Co., can’t recall a similar case. “It’s very rare for a deal this large between a tech giant and a startup to be leaked to the press and then canceled a week later,” he says. “In contrast, most deals that are announced ahead of schedule end up being closed.” There may have been some regulatory hurdles if the companies had signed a binding agreement, but there are many unknowns here, such as the size of Waze’s market and its dominance in that market.

“In the minds of entrepreneurs who sell their company to a giant, there is always a fear of selling at a price below the company’s potential. It will be remembered that Instagram was sold for only $1 billion, as was the navigation app Waze, which is now on hundreds of millions of phones. On the other hand, strong market penetration and the real value of the company are sometimes achieved through a sale to a tech giant.”

During acquisition negotiations, there are many issues that can become contentious and cause the entire deal to fail, says attorney Roy Kanner, head of the high-tech practice at EBN-Erdenast, Ben Nathan, Toledano & Associates. “When a deal is reported in the media, regulators have in the past made it clear through indirect channels that they are required to examine the deal in depth, which can cause delays and even be an early indication that they are not ready to grant approval,” he says.

“When two companies reach the non-binding memorandum of understanding (or term sheet, AG) stage, they move from general understandings to diving into the fine print, committing to confidentiality, committing not to negotiate with competitors, and starting a due diligence process. Then the founders need to provide potential buyers with all the financial and legal information they need.

“At this stage, disputes may arise over financial terms such as ARR, a term with varying definitions. This is not necessarily what happened with Wiz, but issues that were unknown to the buyer, such as tax exposure, intellectual property leakage, or legal claims, may arise, any of which could ruin the deal. Once a binding agreement is signed, regulators and third parties such as customers can also ruin deals.”

This article was published in Globes, Israeli Business News – en.globes.co.il – on July 24, 2024.

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