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Google's (GOOG) advertising business, at nearly 80% of its total revenue, is still the company's bread and butter business, but expanding its cloud computing segment has been central to its growth strategy for many years. Now, GOOG is greatly upping the ante in its pursuit to gain ground on cloud computing giants Microsoft (MSFT) and Amazon (AMZN) as it reportedly considers acquiring cybersecurity company Wiz for $23 bln. According to the Wall Street Journal, GOOG and Wiz, which provides a platform that identifies security threats within data stored in cloud infrastructure, have entered discussions for a deal that could materialize soon.

• Making a huge splash in the M&A market hasn't typically been GOOG's calling card, but it has turned to acquisitions in the past to bolster its Cloud segment. Most notably, In September 2022, GOOG completed a $5.4 bln acquisition of Mandiant, expanding its cyber defense, threat intelligence, and incident response capabilities.
  • During GOOG's Q1 earnings call in late April, CEO Sundar Pichai proclaimed that the company's Cloud business is now widely regarded as the leader in cybersecurity.
  • He added that enterprises are combining GOOG's AI technology, such as Gemini, with its cybersecurity tools, creating a more effective and quicker threat detection system.
• With an acquisition of Wiz, which was founded in Israel but is headquartered in New York City, GOOG would be adding a leading unified cloud security platform provider that syncs up with Amazon Web Services and Microsoft Azure. It looks like a natural fit for GOOG as the company aims to capitalize on soaring demand for cloud storage and an associated surge in demand for tools that protect that data as AI continues to emerge.
• The reported price tag, though, is quite stunning. Wiz is generating about $500 mln in annual recurring revenue, so at the $23 bln valuation, GOOG would be paying roughly 45x recurring revenue. Additionally, according to the Wall Street Journal, Wiz raised $1.0 bln at a valuation of $12.0 bln just earlier this year. WIZ is growing quickly -- annual recuring revenue is up by 43% since the end of 2023 -- but the valuation metrics are still hard to swallow.
• Of course, there are also significant regulatory concerns attached to this potential transaction. GOOG's search and advertising businesses are already facing antitrust lawsuits from the U.S. Justice Department. Therefore, it's hard to imagine that regulators would be thrilled about GOOG making a massive acquisition that could help it achieve a dominant position in its Cloud segment too.

The main takeaway is that acquiring Wiz would instantly help GOOG to close the gap on Azure and AWS, while providing it with a significant growth catalyst, but the regulatory uncertainties and very rich price tag could also provide an overhang on the stock.