IF PAST PERFORMANCE IS ANY INDICATION — and of course we should know better than that — then Oracle may pull off its audacious $7.4 billion acquisition of Sun Microsystems and meet its financial targets with aplomb. But it won’t be a lay-up.
Oracle CEO Larry Ellison, who last week was in Spain to watch his yacht in the America’s Cup races, has proven himself an adept acquirer of technology companies. Before his hostile takeover of PeopleSoft in 2005, the conventional wisdom was that technology mergers, much less takeovers, didn’t work. Ellison has proven that wrong. Since that epic takeover battle, Oracle (ORCL) has acquired some 60 tech companies with disciplined success, adding two new outfits just last week. But most of those targets have been software concerns, transforming the database giant into the world’s largest business-software company in the process.
The Sun deal is different. Sun is a hardware company, famous for workstations and screaming-fast servers for the back offices of Wall Street. And that is a different proposition than selling software. Hardware is more of a commodity than software, and customers’ ability to switch hardware vendors is far less problematic. The software customer lock-in has been key to the nimble execution of Oracle’s roll-up strategy. In fact, many observers speculated that Oracle’s original intent was to keep Sun’s software away from rival International Business Machines (IBM), and shed the hardware assets. But that wasn’t the plan laid out by Ellison a couple of weeks ago: Oracle is entering the hardware fray in force. The CEO and co-presidents Safra Catz and Charles Phillips have earned their stripes as acquirers, and Wall Street is giving them the benefit of the doubt.
“They’ve been able to build up a track record and, more important, the processes to do this. [M&A] is a core competency,” says Pacific Crest Securities software analyst Brendan Barnicle, who rates the stock Outperform with a target of 32. Oracle shares now are around 23, about 12 times fiscal 2011 consensus earnings. That’s lower than the price/earnings ratio of 14 times for the American depositary shares of German software rival SAP (SAP), which recently sacked CEO Leo Apotheker. But it’s pricier than IBM, which is trading at 10 times fiscal 2011 earnings.
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