Why Oracle's Stock Should Reach $45 on the Micros Systems Acquisition

NEW YORK (TheStreet) -- Oracle (ORCL) CEO Larry Ellison understands his company's growth challenges are real. But very few companies are as deep-pocketed as Oracle and have worked as hard to put its excess capital to use.

As he's done more than a dozen times over the past year, Ellison went shopping for growth. This time he's spent $5.3 billion on Micros Systems (MCRS), a software specialist company for the restaurant and hospitality industry. This is Ellison's largest deal since picking off Sun Microsystems for $7.4 billion in 2010.

In the case of Micros Systems, Oracle sees an opportunity to accelerate its growth in cloud computing. With Oracle's size and scale, Micros Systems' strong innovative edge and operational efficiency will propel Oracle's stock towards its all-time high of $45 on its way to $50. Oracle currently trades at $41, up over 7% for the year to date

Assuming that Oracle retains Micros System's management, I have every reason to believe they are the steal in this deal. With evidence pointing to an evolution towards mobile payments, Oracle is moving to an area where it believes the puck will land next.

For Ellison, it's not an expensive deal. At about $68 per share, or $4.6 billion net of Micros' cash, Oracle is paying an 18% premium above Micros Systems' closing price prior to leaks of Oracle's M&A interest was first reported by Bloomberg.

The more pressing question is, what does it mean for Oracle's stock in the near term? How much long-term value can Ellison extract from this deal? Tthat's where accretive details of the deal begin to matter.

It's true Oracle is addressing a top-line need. But after the company's recent 4% year-over-year decline in profits, Ellison also needs to bolster Oracle's bottom line. This is what he envisions in this deal for Micros Systems, which is expected to close in the second-half of 2014.

Until now, Micros Systems, which also builds cash registers for retailers, was a mystery. The company competes with point-of-sales leaders such as VeriFone (PAY) and NCR (NCR). If you're surprised by this deal, don't be.

Consider that in its most recent quarter, Micros Systems delivered revenue and earnings growth of 7.4% and 13.6%, respectively. Equally impressive, the company's management has guided for fiscal year 2014 revenue to reach as high as $1.385 billion, which suggests 9.2% year-over-year growth. Full-year non-GAAP earnings-per-share is projected to grow to $2.57, or 8% year over year.

What's more, Oracle is buying a company with a pristine balance sheet -- one that generates $240 million in operating cash flow and has zero debt. Not to mention, Micros Systems outperforms both VeriFone and NRC in areas like gross margin and operating margin.

Last week, despite the downbeat earnings results, Oracle proclaimed itself at the No. 2 software-as-a-service (SaaS) company -- second only to Salesforce.com (CRM). Only a couple of years ago, the joke was that Oracle had "no idea what the cloud was."

As with this deal for Micros Systems and the dozens that came before it, investors and industry observers continue to underestimate Ellison's ability as a savvy acquirer. With recent acquisitions for Responsys (MKTG) and cloud marketing technology specialist BlueKai, Oracle has been clear that it has no issue with buying what it can't build.

The volume of data that can be collected from retail/hospitality transactions have to be stored somewhere. The cloud is the most likely destination. With Oracle's capabilities in data analystics, the company is making its own path in enterprise software and cloud-based services.

With Oracle stock trading at only 11 times forward estimates, this is one of the best bargains on the market. And Micros Systems' projected earnings growth just made Oracle that much cheaper.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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