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Oracle Smokes Out Cloud M&A Hopes

In the game of expectations that is the technology sector, a shift in merger and acquisition activity toward traditional businesses such as networking and away from cloud computing could damper Oracle's story to investors.

That's the case even for Oracle if the company's acquisitions make economic sense and threats from cloud competitors may be overstated.

"Tekelec has roughly 80% market share in the $100 million diameter signaling market today, which is expected to grow to nearly $500 million by 2017 and a high-20% market share in a $770 million policy management market, which is expected to rise to $2.5 billion by 2017," Dmitry Netis, a William Blair analyst, wrote in a Tuesday note that emphasized Oracle's emergence in the telecoms market

Oracle shares fell over 2% on Monday on its Tekelec acquisition, putting five-day share losses in excess of 12% since the company reported third-quarter earnings. The company's stock closed up less than 1% to $31.53 on Tuesday.

Still, Oracle's lack of performance in software licenses and cloud services may be overblown, as some try to paint a story of the company's demise to, Workday and even Amazon.

"Oracle has acknowledged that Workday and Salesforce have credible, competitive products in the human capital management and customer relationship management space. These two vendors are seen as potential structural overhangs for Oracle," Raimo Lenschow, a Barclays analyst, wrote of weak third-quarter results.

Lenschow estimates the threat of cloud competitors to Oracle's total revenue and earnings per share at around 1% and 2%, respectively.

Oracle reported third-quarter earnings of 65 cents a share on $8.97 billion in revenue, as new software licenses and cloud software subscription revenue were down 2% to $2.3 billion. Analysts polled by Thomson Reuters were looking for earnings of 66 cents a share on $9.38 billion in revenue.

Total software revenue was up 4% to $6.67 billion, and hardware systems revenue declined 16% to $1.24 billion. Services revenue fell 8% to $1.045 billion.

Although Oracle shares appear under pressure given headwinds to business spending and weak performance on software growth, the bigger issue for investors may be a change of expectations away from cloud computing.

Look for the company's shares to get a lift were Oracle CEO Ellison to again push the company's cloud development, either through acquisitions or greater communication with investors.

-- Written by Antoine Gara in New York

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