A few weeks ago, we started a poll asking which company Oracle will acquire next. Thanks to all the bloggers in the community who got the word out, we received a staggering 1,250 responses before closing the poll. This is what you had to say.
The favorites were two of our “fairly straightforward ideas,” Informatica and Teradata, each with 14% of the votes. This suggests that 28% of our voters believe Oracle will play it safe the next time around and strengthen their already formidable data warehousing and business intelligence offerings.
However, more than a few of you were a little bolder with your predictions, arguing that Oracle is going to make one or two “pricey buys in hot markets.” With VMWare getting 143 votes and Salesforce.com getting 115, 20% of our readers feel that the Sun deal is merely the first in a series of game-changing buys for Oracle.
The “bold moves into the network layer” were less popular with voters. We understand why. Although the mobile possibilities of Research in Motion certainly seem to have piqued some interest with 80 votes, Brocade and F5 Networks did not fare as well with 4% and 3% of the vote respectively.
All three of our “messy but potentially profitable” ideas ended up in the bottom six, with Infor as the least popular option overall. Clearly, our voters are less concerned about the high valuations of companies like VMWare and Salesforce.com than they are about the potential complexity of integrating targets like Computer Associates and Infor.
Of course, our knowledgeable readers had ideas of their own, many of which offered food for thought and a few of which flew right in the face of our framework for possible targets. Here, we think, are some of the more interesting ones, even if we may not agree with them as logical options:
- Akamai. Doc Searls put this idea on the table in our comments section: “They’re the future of TV as it moves from over the air and cable to the Net, and as the content sources bypass conventional cable.” However, Searls and others agree that Akamai is not likely for sale. Even if it were for sale, Akamai’s high P/E of 58x means it falls well outside of the financial criteria we believe will guide Oracle’s acquisition decisions. It’s also very far afield relative to Oracle’s traditional markets.
- Capgemini. Josh Greenbaum mentioned this global systems integrator as a viable option, which may not be a bad idea considering that Oracle competitors have made similar purchases. With IBM buying Price Waterhouse Coopers and HP buying EDS, Oracle might be interested in a consulting company of its own. From a holistic standpoint, services are part of the stack. Capgemini would be a logical target.
- Lawson. A few readers mentioned this company as an opportunity for Oracle to grow its applications and industry solutions. Lawson’s M3 and S3 apps, in combination with their highly respected industry-specific solutions for retail and healthcare, certainly make them a desirable target. Considering Lawson’s own aggressive growth strategy in recent years, they seem intent on competing with Oracle, not joining them.
- NetApp. Many have cited this data storage player as a good option. As one reader suggested in the comments on our previous post, NetApp and Oracle have been collaborating for several years now, which means that many Oracle users are already familiar with NetApp. However, we think collaboration may be as far as this relationship goes: a P/E of 36x likely puts this one out of reach.
A few of our more vulture-like readers suggested a swoop on HP as it goes through a major leadership transition. But Ellison’s admiration for the defamed ex-CEO Mark Hurd will not make that $95 billion market cap any smaller. Nevertheless, as we’ve said from the start, it’s fun to consider all the possibilities, and the fun doesn’t have to stop here. Be sure to leave a comment below if you have any other ideas, and in a few months, maybe one of us will be right on the money.
Beginning in late 2004 with its acquisition of PeopleSoft, Oracle initiated an acquisition campaign that has brought over forty companies into the Oracle fold. During that time, Oracle has made five multi-billion dollar acquisitions – about one per year – all of which have made for big news in the ERP software market.
With the Sun Microsystems deal closed, we thought it would be fun to guess who might be next on Oracle’s M&A agenda.
In the post that follows, we attempt to make a few educated guesses on Oracle’s next move based on the criteria they employed in their past acquisitions. We also want to hear from you. What company do you think will be Oracle’s next target? Be sure to take our survey and express your opinions.
Before we go any further, let’s put this all in context by looking at a graphical illustration of Oracle’s recent M&A activity.
Our diagram includes all acquisitions since the PeopleSoft deal. However, for this post, we will focus only on the blockbuster deals: bold moves involving multi-billion valuations. Those are more interesting.
Oracle’s M&A Strategy
At the highest level, the motivations behind Oracle’s largest acquisitions appear to be the following:
- Grow market share leadership in key enterprise markets;
- Expand profitability by consolidating high-margin support revenue; and,
- Increase strategic relevance by offering a complete technology stack.
Each of Oracle’s five blockbuster deals met these requirements. Peoplesoft, Siebel and Hyperion all bolstered Oracle’s market share position in the applications market while contributing captive customer bases that pay highly profitable support fees. BEA Systems was particularly strategic given its leadership in the middleware market – an increasingly critical part of the Oracle strategy given the need to integrate so many applications. Finally, Sun Microsystems brought recurring support revenue but was most interesting because it demonstrated Oracle’s willingness to move into a major new layer of the stack – servers and storage (including hardware).
Oracle’s Criteria for Acquisition Targets
Oracle’s bold move to acquire Sun Microsystems and enter the server and storage market makes our attempt to prognosticate all the more fun. We can now consider deals that fall just outside of Oracle’s traditional enterprise software markets and even consider new layers of the stack.
At the same time, we need to apply a framework to our analysis that keeps our ideas from getting too radical. Toward that end, we identified the following five target criteria that we think Oracle will stick to in any blockbuster deal:
- A large customer base with substantial recurring support revenue;
- A leadership position in an enterprise technology market;
- Relevance to Oracle’s integrated technology stack strategy;
- An accretive pro forma combination, assuming cost synergies; and,
- A valuation that represents up to 20% of Oracle’s valuation, no more.
How We Built Our Target List
With these criteria in mind, we built a long list of enterprise technology vendors that trade at multi-billion valuations (note: we did not limit ourselves to software). We then took a fast cut at eliminating the behemoths that are too big for Oracle to swallow: Cisco, HP, IBM, Microsoft and SAP.
As ideas bubbled up, we found a need to bucket them into different categories. Some are logical ideas that meet all of our criteria and make sense. Others are a little more out there, but provide interesting food for thought. Of course, anything is possible. Here goes…
Fairly Straightforward Ideas
These are all targets that fit within existing Oracle markets and don’t seem like radical ideas to us.
- Teradata. This data warehousing and business intelligence (BI) play would check a lot of boxes, augmenting Oracle’s strength in databases and BI. Moreover, Teradata brings strength in key verticals. At 21x P/E, the price might work.
- Informatica. Another data warehousing play, Informatica would complement Oracle’s leadership in database and business intelligence. While the deal would be bite-sized, Oracle would have to eliminate a lot of costs to make it acretive.
- TIBCO. Like the BEA Systems deal, TIBCO would bring the benefit of adding a middleware market leader while also bolstering the Fusion story. With a P/E of 34x, this is another deal where Oracle would have to cut costs deeply.
Messy, But Potentially Profitable
These “roll-ups” have been engineered for profitability by savvy investors, but they add execution risk given disparate code bases, etc.
- Computer Associates. Computer Associates was a consolidator long before Oracle ramped up its M&A efforts. Of course, that history comes with some messy situations along the way. The deal could work financially given CA’s modest valuation at 14x earnings, but might not be worth the stress or integration.
- Sungard. This very large applications vendor and its various business units bring leadership positions in a range of vertical markets. The company was taken private a few years ago by savvy private equity investors, so an exit event is likely just over the horizon. However, Sungard brings a large services organization that might not be Oracle’s thing.
- Infor. Infor is another major applications consolidator backed by smart private equity. The company is similar to Oracle in that its M&A strategy is engineered for healthy profits; however, Oracle may not be willing to take on such substantial integration challenges in the applications layer.
Bold Moves into the Network Layer
Most people will tell us that these ideas are crazy. They are far afield from Oracle’s traditional markets and too expensive. We agree, but stranger deals have happened (e.g. eBay/Skype).
- Research in Motion. This one is far fetched, but given the massive popularity of mobile applications, we had to throw it in. RIM has the strongest enterprise presence of the various mobile players, so it would be an ideal target. The valuation metrics might be doable, but the size may be hard to digest.
- Juniper Networks. An acquisition of Juniper would be a bold move into the network layer of the stack. If Oracle wants to play in that market, Juniper is the strongest target (Cisco is too big, too expensive). Of course, Juniper isn’t cheap and cost synergies would be hard to come by given limited overlap.
- F5 Networks. If Oracle wants to strengthen its application delivery and data center story, F5 would be an interesting step. The company’s application delivery and networking systems would provide a growth vehicle in the networking layer.
- Brocade. Like F5, Brocade would be a strong addition to Oracle’s data center and enterprise campus network offerings. However, like Juniper, Brocade is not the cheapest option listed here, as it currently sits at a 29x P/E
Pricey Buys in Hot Markets
- VMware. It’s tough to come up with a financial scenario where this deal gets done, but its fun to think about. VMware is benefiting phenomenally from the growth of the virtualization market it pioneered. This would be another huge boost to Oracle’s data center offerings.
- EMC. This data storage behemoth would be a huge addition to Oracle’s presence in the servers and storage layer of the stack. We think Oracle would love to own this market leader, but it may well be too big and too expensive at a 29x P/E.
- Salesforce.com. An acquisition of Salesforce has been rumored before, but the success of this SaaS leader may have put it out of reach. Salesforce would catapult Oracle to on-demand leadership, but it comes at a steep price. Oracle would be more likely to wait until Salesforce stumbles some day.
- Allscripts. The healthcare market is hot as providers adopt electronic health records (EHRs) to meet government requirements. Allscripts is the biggest player in the EHR market and is a consolidator itself. Its recent move to acquire Eclipsys, as well as its rich valuation, might take Allscripts off the table.
Well, we put our best ideas out there, so now its your turn. Take our survey below and let us know what you think of our ideas. Or, use the comments section below to write in your own ideas. Be sure to explain your rationale for each.
Thanks
No comments:
Post a Comment