Doing It Right With PeopleSoft

By May 2006, the company had made another $4 billion worth of acquisitions (net of the cash held by the acquired companies) and increased its cash and marketable securities to $7.5 billion, while restructuring its debt load to $5.7 billion in long-term debt. Even though the debt was $3 billion more than the prior year, most of that was offset by the increase in cash -- meaning that the $4 billion in acquisitions was made possible almost entirely through cash flow from operations.

Inside the Numbers

Speaking of cash flow, in the year ended May 2007, Oracle generated $5.5 billion of it from operating activities, and spent only $320 million of it on capital expenditures. That turns out to be a free-cash-flow yield of 4.5% from the existing businesses. Most of that continues to be invested in new acquisitions for new growth opportunities. The free cash flow has increased 55% since fiscal year 2005.

Meanwhile, SAP generated approximately $2 billion in free cash flow last year, giving it a 3% free-cash-flow yield. Its acquisition avoidance has left the free cash flow essentially unchanged over the last three years (though arguably the change in the euro/dollar exchange rate is providing growth).

A higher yield and growing free cash flow compared with a lower, flat one is not much of a choice in my book.

If any doubt remains over which strategy is working better, one need only turn to a price chart. Since Oracle closed the PeopleSoft acquisition in January 2005, its shares are up 70% (mostly driven by rising cash flow), compared to just more than 30% for SAP over the same time. To me, it seems like that is exactly the type of "challenge" SAP would want to adopt.