Oracle Sticks to Its Guns as Microsoft Horns In

A week after Oracle(ORCL Quote - Cramer on ORCL - Stock Picks) upstaged Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) in the earnings department, the world's largest software maker fired back with a key acquisition on Oracle's turf.

By snatching up Great Plains Software(GPSI Quote - Cramer on GPSI - Stock Picks) in a $1.1 billion stock deal, Microsoft is making inroads into the Internet-based business software applications market. That's exactly the market that Oracle CEO Larry Ellison has staked his company on in recent years.

Analysts heaped praise on the Great Plains acquisition Thursday, talking up its significance as a move by Microsoft away from the slowing, PC-connected software market into the growing, Internet-based business market. Great Plains makes accounting and other back-office software that can be distributed over the Internet. Still, Oracle stuck to its guns, insisting that it remains the leader, while some observers point out that the deal fails to address Microsoft's key problems. On a flattish day for tech stocks, Microsoft rallied $1.94 to $43.44, Oracle added $1 to $29.50 and Great Plains jumped $11.25, or 32%, to $46.36.

Revenge?

When Microsoft warned last week that it wouldn't make analysts' earnings or revenue estimates for its fiscal second quarter because of slowing sales across the PC industry, Oracle, which hit estimates, couldn't wait to scoff. Oracle, after all, has stressed its approach as "software as a service" provided over the Internet, in contrast to Microsoft's practice of selling shrink-wrapped disks to install on the hard drives of PCs.

Oracle executives quickly stressed that they had made the right choice in the mid-'90s by focusing on Internet-based business software, while Microsoft had fumbled badly by tying its fate to PC software. But Microsoft isn't going to take that kind of talk lying down, as illustrated by what will be its biggest acquisition since last fall's $1.3 billion buy of Visio.

Way Ahead Oracle outperforms in the Net era

"Oracle does very little for small and medium-sized businesses," says Microsoft's director of Web services for business applications, James Utzschneider. "Great Plains is the leader in that market, and will continue to be with us."

Analysts agreed that Microsoft will boost its Net offerings with the deal, its second-largest ever. "It makes a lot of sense for them to buy this kind of company that they can drop into their Microsoft.Net," says Morningstar analyst Joseph Beaulieu, referring to Microsoft's initiative to forge into the underlying infrastructure of Internet-based software. "They've been wanting to have a greater presence in the applications market to run on top of that, and this is another thing they now have to sell."

(Morningstar doesn't rate stocks, though it has been recommending Oracle lately as a potentially good investment, while it has shied away from endorsing Microsoft. It doesn't do underwriting.)

'Our Idea'

But Oracle donned its best No Fear T-shirt in the wake of Microsoft's announcement. Mark Salser, senior VP of advanced technologies at Oracle, says it is interesting that Microsoft is suddenly trying to get into the business of selling software as a service, over the Internet, instead of as a product in a shrink-wrapped box.

"We like that idea," Salser said. "By the way, it's our idea. But we've already been doing this for five years. Someday, we'll be so far ahead in the applications market that it won't matter at all. They have no strategy."

Indeed, some analysts agree that there's some parroting going on. "Now, Microsoft is stepping directly into the business applications market for the first time," says Jim Pickrel, an analyst for Chase H&Q, who rates Oracle a buy. "Why would they be doing that? I think some measure of it is looking at the Oracle strategy." (His company hasn't done underwriting for Oracle or Microsoft, though it did underwrite Great Plains' IPO. His firm has a buy rating on Microsoft, and a market perform rating on Great Plains.)

Others think the deal is simply too little, too late for a company that took the wrong strategic road. "The good news is that Great Plains gives them another distribution channel to sell Office, Word, Excel and their database products like Exchange Server," says ING Barings analyst George Godfrey. "The bad news is that this deal does nothing to cure what ails them, which is the company's dependence on PC sales." Godfrey rates Microsoft a buy, and his firm hasn't done underwriting for either company.

For Microsoft, the Great Plains deal is "like having an extra $100 when you're $100,000 in debt," Godfrey says.