Hope That SAP Is Copying Oracle

There has been plenty of hot air this week over SAP's (SAP - commentary - Cramer's Take) acquisition of Business Objects (BOBJ - commentary - Cramer's Take). It's unclear whether SAP is adopting Oracle's (ORCL - commentary - Cramer's Take) big acquisition strategy, or SAP is deploying its existing strategy of small "tuck-in" acquisitions. I'll leave others to bloviate on those issues.

I am less interested in whether SAP is following Oracle's strategy than whether it ought to be. And I believe the answer to that question is a resounding "yes." Let's see what that means for the company and the stock.

Helping the Customer

Corporate IT buyers' main concerns tend to be reducing costs and reducing complexity. Much better to have Oracle and SAP tie together the applications from a number of vendors (by directly integrating them) than to devote in-house IT staff to the task.

Research 2.0 criticizes the Business Objects acquisition for this reason, saying "SAP now faces many of the same incompatible architectural challenges faced by Oracle with its many acquisitions." I think their customers would rather have SAP deal with the incompatibilities than to have to do it themselves. Since when is making life easier for customers a bad thing?

More importantly, however, there are just too many application-software manufacturers out there. While consolidation in some industries occurs because the weaker businesses fail, software balance sheets are generally too strong to for this to happen.

The only way to fix the problem of too many customers chasing a relatively fixed amount of dollars is for an industry leader to soak up the excess capital by leveraging its own balance sheet to acquire other companies -- for cash, not shares. Oracle has been pursuing that fix.

Software companies tend to generate significant cash flow, and Oracle has been able to use this cash flow to fund the acquisitions while maintaining a healthy balance sheet and avoiding dilution to existing shareholders.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.