• Deal to reset valuation expectations as large-scale transactions come back into view
• Regulatory risks exist but enforcers will be challenged to claim monopolistic concerns

Alphabet’s [NASDAQ:GOOGL] proposed USD 23bn acquisition of security startup Wiz will reset valuation expectations for the sector and provide a catalyst for more M&A, industry experts say.

The move by Google’s parent company would make its cloud offering more competitive with Microsoft Azure and Amazon Web Services. Microsoft [NASDAQ:MSFT] and Amazon [NASDAQ:AMZN] dominate the cloud and the enterprise business that comes with it.

Known primarily for its search and advertising business, Alphabet has been building out its cloud offering over the last several years with acquisitions such as data analytics firm Looker for USD 2.6bn in 2019 and cybersecurity provider Mandiant for USD 5.4bn in 2022. Purchasing Wiz would bring artificial intelligence-driven security tools for real-time threat detection and response.

“Google and Microsoft have been going head-to-head on cyber for a few years now,” said Thomas Smale, CEO of M&A advisory firm FE International. “Both have been establishing their presence, but this is Google getting reestablished in a space they want and need to focus on now that people are back in the office and working from home has slowed down.”

A bidding war over Wiz is unlikely, he and several others said, given the premium Alphabet is paying. The startup’s reported revenue run rate of USD 500m would put a 46x multiple on the deal.

“Many companies would love to acquire Wiz, but not at this valuation,” said Smale. The company raised USD 1bn at a USD 12bn valuation just two months ago.

The deal reflects a reset of valuation expectations, and founders will take notice. “You’ll likely see other cloud players come to market sooner than planned,” the advisor said.

Snehal Antani, CEO of Silicon Valley cybersecurity startup Horizon3.ai, predicts a near-term surge in Wiz-like competitors that will try to get themselves acquired citing the price premium Google has offered Wiz.

“However, given the collapse of Lacework, which was a competitor to Wiz, I think there will also be pressure for other cloud security companies to clearly prove their technology is not built on a legacy agent-based architecture,” the executive cautioned. Cloud security platform Lacework, which Wiz was reportedly in discussions to buy earlier this year, sold to Fortinet [NASDAQ:FTNT] in June for what industry sources said was a small fraction of the USD 8.3bn valuation it garnered at its last raise in 2021.

In April, Wiz announced the USD 350m acquisition of Gem Security, an Israeli cloud security company.

Should the Alphabet-Wiz deal go through, it would embolden other large companies to make big moves, Antani added.

Violetta Kokolus, a corporate partner at Clifford Chance, expects it to drive more transactions in cybersecurity. It’s expensive and complex to implement extensive cybersecurity protections, so these software platforms are vital for cloud computing and will become attractive acquisition targets especially as advancements in AI are made, she said.

The pending acquisition could ignite a wave of software consolidation as hyper-scalers like Alphabet, Amazon and Microsoft look to layer software services on top of their cloud computing infrastructure, agreed Scott Devitt, managing director of equity research at Wedbush Securities.

This is likely the beginning of large cloud companies picking off targets in various verticals, as they look to leverage AI to provide additional services on top of infrastructure services, Devitt said.

With interest rates holding steady, strategic buyers are ready to put their money to work, several advisors added. The move for Wiz should embolden them to pursue other big deals, they said.

A return to large-scale M&A in the broader technology sector is under way, according to Daniel Friedman, managing director and senior partner at Boston Consulting Group. Last fall, Microsoft finalized its largest purchase ever when it acquired video game maker Activision Blizzard for nearly USD 69bn, despite vehement opposition and litigation from the Federal Trade Commission.

Even if regulators sue, deals that are logical and not monopolistic can get done, he said. Should there be a change in the White House next year, regulatory burdens should ease, Friedman added.

Alphabet has been in the crosshairs of the Department of Justice for many years, with litigation targeting its search and adtech businesses, noted Peter Mucchetti, a partner at Clifford Chance.

Federal regulators have proven to be “very aggressive with merger enforcement” and will look at horizontal competitive overlap and vertical concerns of buying a cybersecurity startup, he said.

“One important issue for antitrust enforcers is the acquisition of emerging competitors, referred to as ‘nascent competitors.’ The government will consider if Wiz is a competitor that, to date, is less significant but may be more important in the future,” said Mucchetti. Antitrust enforcers “will question where Wiz will be in three years and if it will grow beyond its current importance,” he said.

Even so, Alphabet’s cloud business is small compared to Amazon’s and Microsoft’s offerings. Its market share in cybersecurity “is even smaller, so I don’t think regulators can credibly claim monopoly risk with this deal,” said Horizon3.ai’s Antani, echoing the views of other executives and advisors that Mergermarket interviewed. Still, since Alphabet is an industry giant, scrutiny is expected, they said.

The transaction could actually benefit smaller companies that use Google’s cloud services, said Salim Gheewalla, vice president of marketing and alliances at Calian IT & Cyber Solutions.

“By associating AI security with their offerings, Google can provide these startups with the confidence that their data and applications are protected by cutting-edge security measures,” Gheewalla said. “This not only enhances Google Cloud’s attractiveness to these innovative companies but also ensures a safer development environment for emerging technologies.”