TechWeek: Growth by the Numbers

Hard as it may be to think of Computer Associates(CA) as anything but a case study in irresponsible management, it's worth remembering that the Long Island-based giant was the Oracle(ORCL) of its day in the mid-1990s. It dominated its sector, mainframe and system management software, it was headed by a hard-charging, controversial CEO, and most importantly it swallowed competitor after competitor during its rise.

Why wander down memory lane? Because CA, according to A.G. Edwards analyst Kevin Buttigieg, illustrates how the market values companies that attain most of their growth through acquisition, while evidencing limited organic expansion. The answer: not as well as you might think.

In CA's heyday -- 1995 to 1998 -- its stock traded at a 23% discount to the software industry's relative price-to-earnings ratio and at an approximate 10% premium to the valuation of the S&P 500.

Now look at Oracle, which this week agreed to fork over $5.85 billion in cash for struggling Siebel Systems(SEBL), the latest course in a nine-company takeover binge that has cost the company more than $17 billion if all deals close. Oracle, the database and enterprise applications software giant, is now trading at about 18 times estimated 2005 earnings, while its peers are trading at about 26 times earnings -- which equals a 31% discount -- and the S&P 500 is at 16 times earnings.

All in all, Oracle offers a much lower premium than most tech stocks are awarded vs. the broader market.

Likewise, says the analyst, Oracle stock is getting more expensive on a basis of enterprise value-to-cash flows, since the acquisitions are draining cash on the balance sheet as well as cash flows for restructuring expenditures. "Either way, despite the merits of the Siebel transaction, it is not likely to drive Oracle's stock out of its trading range." he says.