Cloud security start-up Wiz has rejected Google parent company Alphabet’s proposed US$23 takeover bid, instead opting to continue on the path of an initial public offering.
If finalised, the deal would not only have been the largest in Alphabet’s history but also the second-largest in the cyber security sector, trailing only Cisco’s US$28 billion purchase of Splunk, completed in March.
The offer made by Alphabet nearly doubled Wiz’s recent valuation of US$12 billion after announcing it had garnered US$1 billion in its latest funding round in May and was a whopping 65 times the firm’s annual recurring revenue in 2023 (US$350 million).
In an interview with InvestorDaily, Global X investment strategist Billy Leung explored Wiz’s preference for going public and what this could mean for the cyber security sector.
“IPOs may become a more attractive option for raising funds without the regulatory scrutiny associated with large acquisitions,” Leung said.
Also in a bid to avoid “regulatory hurdles”, the investment strategist suggested that an increase of strategic partnerships, as opposed to outright acquisitions, could be on the horizon.
“These partnerships allow companies to collaborate and leverage each other’s strengths without the complications of a full merger.”
For companies like Wiz, Leung emphasised that the trade-off between retaining control and facing higher operational costs is crucial as they move forward independently.
“Going public allows Wiz to retain control over its strategic direction and decision making, which can be crucial for maintaining its innovative edge and company culture,” he said.
At the same time, this independence comes with the need to invest more in distribution and other operational aspects that a larger corporation might handle more easily. It might also result in delayed profitability or slower margin improvement on the back of these increased expenditures.
As such, Leung highlighted that Wiz’s decision to pursue an IPO reflected strong confidence in its ability to grow independently.
“The company aims to reach $1 billion in annual recurring revenue, up from its current $350 million, showing substantial growth potential within the cyber security sector,” he said.
Meanwhile, Betashares investment strategist Hugh Lam labelled Wiz’s rejection as a “vote of confidence” in the global outlook for the cyber security industry.
“First of all, there is a growing trend of big tech companies looking to build out their cyber security capabilities with not only Alphabet looking at Wiz, but also Cisco paying $28 billion for Splunk in March this year,” Lam told InvestorDaily.
“Moreover, the move by Wiz to go it alone highlights their conviction in the growing global addressable market for global cyber security and their role in that growth.”
Lam added that the strong outlook for the cyber security industry, combined with potential interest rate cuts by the Federal Reserve, is likely to provide a “healthy” tailwind for M&A activity in the sector.
“Further to these conducive conditions, global mega-cap tech companies are sitting on strong cash reserves, so they may well look for attractive opportunities to deepen their presence in the growing cyber security industry,” he said.
Despite this supportive backdrop, Lam cautioned that the sector is not without risks.
“Given the long-term outlook for cyber security, plus the potential for events like the recent CrowdStrike outage, it’s our view that investors should take a diversified approach to the sector,” he said.
Separately, Lam has highlighted that the “blue screen of death” CrowdStrike crash last month shows the interconnectedness of global network infrastructure and the disruptive impact that any malfunction can have on different industries.
“While this was a global systems failure rather than a cyber attack, bad actors may take advantage of this event to capitalise on any weaknesses in IT capabilities across enterprises,” he said in a recent market commentary.
“Overall, the CrowdStrike outage is a timely reminder about the importance of resilient IT systems to the global economy. We expect this to provide a tailwind to the cyber security sector over the decades to come, as businesses and individuals spend more to keep themselves safe online.”
