Google-Wiz M&A Lesson – How To Turn Down $23Bn
What should we glean from the reported collapse of Google’s expected deal to acquire Israeli cyber company Wiz for $23 billion? Wiz apparently now prefers to go for an IPO (initial public offering) on a stock exchange exchange instead of an expected acquisition by Google. But why walk away from $23 billion? We discuss below how M&A (mergers & acquisition) deals are done and undone.
Preparing for the deal:
Before any planned M&A deal, there are a number of steps for both sides, the intending buyer and the intending seller. First, prepare the objectives, reasons, information, advisors and the business itself. Second, identify candidates. Third, auction, woo and negotiate. A letter of intent (LOI) may ensue. Fourth, usually in parallel to the foregoing, due diligence (“DD”) by the intending buyer. The seller will check the buyer has finance in place. Fifth (if it happens), execute the main agreement. Sixth (if it happens): post-deal integration.
In the Google-Wiz case, both sides had advisors, and Google had/has ample cash reserves. But no LOI was ever announced.
What type of deal?
There are many ways to cut an M&A deal. Do the parties envisage a share (stock) sale? An asset purchase? A management buyout? An exclusive license or supply contract. Much will depend on which party has the upper hand in the negotiations.
In this case, no deal was cut.
The parties’ motives?
In this case, Google had a cash pile of over $110 billion and presumably wanted Wiz and its cloud security technology to help stay ahead.
But Wiz apparently has other options, such as an IPO.
Wiz was founded in 2020 as a cyber security company and adapted its business model a year later to focus on cloud security for big companies. Always look for new trends and look ahead. Wiz presumably plans to be worth even more than $23 billion.
Due diligence aspects:
Due diligence means reviewing things. It is usual practice for the seller to give the buyer access to documents in a secure virtual data room.
But what makes the seller business tick?
In the case of Wiz, The R&D took place despite the lack of any R&D grant or tax incentives – just highly motivated geeks with excellent experience (ex-IDF 8200 unit, previous exit success). It seems the geeks are not yet ready to hang up their boots.
Competition:
In the case of Wiz, an arch competitor happens to be CrowdStrike, the Microsoft supplier that apparently caused a global computer system outage on July 19, 2024.
On its website (https://www.crowdstrike.com/compare/crowdstrike-vs-wiz/), CrowdStrike writes: “Why customers choose CrowdStrike over Wiz? An incomplete CNAPP (Cloud-native application protection platform); Lacks essential cloud security capabilities; CWP agent entirely lacks runtime prevention, crucial for real-time response; No native ASPM, leading to reduced visibility into application workloads and APIs; Missing native security modules needed for critical alert context and attack path analysis (EDR, identity, threat intel, exposure management).”
A lot of initials there. Google presumably checked out the technical, financial and legal side of Wiz and its intellectual property (IP), among other things.
And we assume that Wiz has a business plan showing how and when it expects to achieve its goals and exploit its commercial advantage.
Taxation:
Sellers usually prefer a share sale. That way shareholders may pay 25%-33% Israeli capital gains tax, or 0% generally if they are foreign investors, but they should check their home country taxation.
But the buyers typically prefer to buy the main assets – which can increase the overall Israeli tax liability for all selling shareholders to around 50%.
Moreover, the buyer must withhold Israeli tax upfront – typically 25%-30% – from the sale consideration unless the sellers produce clearance for any lesser rate of tax.
So, in the Google-Wiz case, the main losers are the tax authorities of Israel, and elsewhere. If, say, half the Wiz investors are Israeli residents, the Israeli Tax Authority might be missing out on around $3bn (NIS 11.5bn) of tax revenues.
So what happened?
Wiz describes itself as follows: “Wiz is the #1 cloud security company on the list and one of the biggest movers from last year, alongside OpenAI. What an honor!” (https://www.wiz.io/blog/wiz-the-top-ranked-cloud-security-company-in-forbes-cloud-100)
In our experience, M&A transactions are roughly 10% tax, 10% legal, 10% economic…. and 70% psychological. Could that explain what happened here? Psychology (human behavior) played a large part in other deals that were delayed or abandoned.
Next Steps:
We have much experience of M& A deals of all sizes. Please contact us if you are considering buying or selling a business.
As always, consult experienced professional in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
© Leon Harris July 23, 2024