For Oracle (
), the past several years have been defined by an ambitious
acquisition strategy engineered by the business-software giant's
outspoken and abrasive CEO, Larry Ellison. Investors like the
growth: thanks to a recent surge, Oracle shares are at their
highest level in a decade.
While Oracle has spent well over $20 billion buying software
makers large and small in recent years, it's worth noting that the
rambunctious Ellison's latest big deal - the $7.3 billion purchase
of Sun Microsystems early this year - has taken the software
provider where it's never before competed.
Sun, known for its server computers and related data-storage
equipment, marks Oracle's first foray into the hardware and
computer-chip markets. Some people initially figured Ellison was
simply after Sun's valuable "Java" software product, but Ellison is
clearly intent on keeping the whole Sun-chilada: Oracle, he
contends, can dramatically improve Sun's historically hit-or-miss
profit margins, and the integration of hardware and software
expertise promises to better position Oracle for a changing tech
If that proves to be the case, and the Sun deal helps Oracle
outpace forecasts, the enthusiasm with which Wall Street has
greeted the Oracle/Sun combination might turn out to be justified.
More expansion lies ahead, most likely. Just this week, Oracle
announced a relatively small-beans $1 billion cash purchase of
e-commerce software provider Art Technology Group (
). That's in line with scores of other industry acquisitions Oracle
But Ellison, in between pursuing acrimonious
intellectual-property litigation with software arch-rival [[SAP]]
and Google (
), has been signaling lately that he's interested in making more
outside-the-software-box acquisitions. Valley matchmakers swooned
recently, after he specifically mentioned the computer-chip group
as a segment of interest.
Ellison's company, which historically pays cash for its
acquisitions, still has plenty of green.
It helps that the corporations, governments and other large
clients that make use of Oracle "enterprise" software to manage
their sprawling operations are pretty stable customers. Oracle
slugs it out with SAP and/or Microsoft (
) in many enterprise areas, of course, but it's less exposed to the
more volatile consumer side of the software business.
The recession dampened sales, particularly to big clients in the
financial sector, but those markets are rebounding. And despite
seasonal swings, the revenue contribution from earlier acquisitions
tends to keep Oracle in growth mode.
Cash flow is strong, so even though the company's long-term debt
has been rising as it paid out $10.3 billion for PeopleSoft (2005)
and $8.5 billion for BAE (2008), debt-to-equity levels have
In Oracle, potential investors face two questions. One is
numbers-based: YCharts' proprietary valuation system suggests that,
despite Oracle's robust fundamentals, the stock is overvalued. The
p/e's at about 23.
If Oracle manages to squeeze more profit out of Sun in coming
years than it and others first projected, of course, the stock may
support a bigger multiple than it currently appears to merit. The
second question hanging over Oracle shares is harder to calculate:
Will Oracle overreach?
Synergies are swell. Economies of scale? Can't beat 'em.
The Sun deal remains rife with question-marks for now. Oracle
has boosted its restructuring set-asides for the combination even
as it brags about Sun's future potential.
But galloping growth and expansion beyond the company's zone of
historical expertise could lead to a fall. If Ellison goes shopping
outside his home sector to buy chip companies or another hardware
maker, as he seems determined to do, he will be increasing the odds
that Oracle will eventually make an acquisition blunder.
doesn't reflect the possibility that the company may one of these
days acquire a fixer-upper it won't know how to fix.
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