NEW YORK (TheStreet) -- Oracle (ORCL) announced the acquisition of the hospitality and restaurant technology provider Micros Systems (MCRS) for $5.3 billion. It's the biggest deal ever in the point of sale systems market, as Oracle, the world's second largest maker of business software, looks towards external sources to revive its sluggish growth.
This is the latest in the string of takeovers in the hospitality and restaurant sector. The deal follows Priceline's (PCLN) $2.6 billion acquisition of restaurant reservation service provider OpenTable (OPEN) and Google's (GOOG) (GOOGL) acquisition of the restaurant website builder Appetas.
Oracle is paying a 17.8% premium over Micros System's closing price on June, 16, before markets started speculations about a possible deal. The transaction is expected to close in the second half of the current year.
The acquisition will likely give a much needed boost to Oracle's revenue and earnings from software maintenance and hardware while strengthening its position in the hospitality and retail sector. Moreover, the markets are also expecting additional acquisitions over the next two years that could fuel its growth over the long term.
Oracle's shares have risen by 7.8% this year and are currently trading near $41. The company has outperformed the S&P 500 ETF (SPY) which has risen by 6.4% for the year to date.
Oracle's acquisition comes after the company released its disappointing quarterly results that highlighted its flagging growth. For the three months ending May 31, Oracle reported a 3.4% year-over-year increase in revenue to $11.31 billion which translated into earnings of 92 cents a share. This growth was driven by 4% increase in software and cloud computing revenue to $8.9 billion.
The company ended up missing analysts' estimates of earnings of 95 cents a share from revenues of $11.48 billion.
However, this acquisition can expand Oracle's foothold in the hospitality and retail sectors, opening doors to a new income stream that will generate recurring revenues from software maintenance. The acquisition will also allow Oracle to grow its revenue from its hardware unit.
Micros Systems, which provides software services, and sells point of sales systems for hotels, restaurants and retailers, has said that more than 330,000 sites in 180 countries are currently using its products. The company has an impressive portfolio of clients which includes luxury hotel operators such as Hyatt (H)H, Hilton (HLT)HLT and Marriott (MAR), fast food and quick service restaurant owners such as Yum! Brands (YUM) and Burger King (BKW); and retailers such as Lululemon (LULU), Adidas (ADDYY) and IKEA.
In its last quarterly results, Micros Systems generated 66% of its revenue by providing maintenance services, 23% by selling its hardware and 11% by selling its software.
Unlike Oracle, Micros Systems has been reporting double-digit growth rates over the last three years. In 2013, the company's revenue increased by 15% to $1.27 billion.
Micros System will likely continue growing as, according to the National Restaurant Association, fine, casual and family dining restaurants are expected to increase their technology spending. Meanwhile, the point of sale software market could grow by more than 3% this year, as per Ibisworld's estimates.
Oracle's CFO Safra Catz has said in a statement that the deal will be accretive to the company's adjusted earnings immediately. Over the next 12 months, according to analysts' estimates, Micros could increase Oracle's earnings by between 3 cents and 4 cents a share from a 3% to 4% increase in revenue.
Moreover, analysts have said that Oracle will announce some major acquisitions of between $15 billion and $20 billion over the next two years that could drive its top and bottom line growth. Despite reporting 11 takeovers over the last 16 months, Oracle still has ample fire power to do that. Last week, Catz said that Oracle's cash reserves, including marketable securities, stood at more than $39 billion.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates ORACLE CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate ORACLE CORP (ORCL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 8.0%. Since the same quarter one year prior, revenues slightly increased by 3.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
- ORACLE CORP reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ORACLE CORP increased its bottom line by earning $2.39 versus $2.26 in the prior year. This year, the market expects an improvement in earnings ($3.18 versus $2.39).
- Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Software industry. The net income has decreased by 4.2% when compared to the same quarter one year ago, dropping from $3,806.00 million to $3,646.00 million.
- Net operating cash flow has declined marginally to $4,456.00 million or 2.36% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
- You can view the full analysis from the report here: ORCL Ratings Report