Larry to Henning: Bring it on.
OK, Oracle's (ORCL) - Get Report combative CEO Larry Ellison didn't really challenge SAP's (SAP) - Get Report CEO Henning Kagermann to a fight this week. But Ellison is determined to move -- and move hard -- against SAP's lucrative software hold on industry segments, such as banking and retail.
Case in point: this week's $593 million offer for India-based I-flex Solutions, a coup that Oracle M&A meister Charles Phillips said has been cooking for a year.
I-flex will likely cost Oracle as much as $316 million on top of the initial offer, since Indian security laws require the company to issue a tender offer for 20% of the shares outstanding. The added expense will bring the total to $909 million, or just under 3.5 times I-flex's fiscal 2005 revenue of $261 million and nearly 20 times the company's net income of $46 million.
The purchase may not have been "screamingly cheap," as one analyst put it, but it exemplifies Oracle's over-arching strategy of driving earnings by building expertise and sales in key segments, or verticals. "This is the future of our applications strategy," says Phillips, referring to I-flex and the recent acquisitions of ProfitLogic and Retek, which build software for retailers. "We are going to go deeper and deeper into these industries," he added.
Oracle already has a solid footing in banking and financial services via sales of its flagship database software plus non-banking-related applications, and now it hopes to leverage that position into sales of applications -- and services -- as banks move to replace aging data systems, some 30 or 40 years old. According to Phillips, the upgrade bill could total some $70 billion, making it one of technology's richest prizes.
So far, Wall Street seems to like the deal. "Oracle is a machine," says Michael Maxworthy, a partner in Marlin & Associates, a New York-based investment bank that has a position in Oracle. "They'll be able to throw this one into the mix and make money."
One big plus that Maxworthy and others note: Oracle is going to run I-flex as a stand-alone entity, leaving existing management in place. That makes analysts happy because the structure spares Oracle the pain of integrating a company with more than 5,000 employees and offices in India, China, Europe, the U.S. and the Middle East into the fold.
More importantly, says Phillips, the two companies already have a well-developed partnership, and 90% of I-flex's customers run Oracle databases.
By and large, Oracle hasn't gotten much static over the integration question -- which loomed large after the massive PeopleSoft acquisition -- but the often skeptical analyst Charles DiBona of Sanford W. Bernstein says Phillips may be glossing over some significant difficulties. "The fact that I-flex customers run on Oracle databases doesn't mean the applications are integrated. There's more to it," he said.
Oracle is already deep into Project Fusion, the melding of software from PeopleSoft, J.D. Edwards and Oracle into a unified platform or infrastructure, and DiBona worries that buying yet another company could divert resources and attention from what he sees as Oracle's biggest challenge. "They should stay focused on the infrastructure side of the business. The verticals can come later when they have a better foundation."
Phillips dismissed BiBona's objections on the call, saying "They are already partners, they know our road map, they know what our middleware will be. I don't see the downside."
Despite his concern, DiBona rates Oracle a buy -- at least in the short term. "They are going to make their numbers," he say. Bernstein does not have a banking relationship with Oracle.
The rumor that struggling
is in play, with Oracle as the likely suitor, heats up every few months and never quite goes away. So when shares of BEA jumped 5% on Wednesday, the software vendor's largest percentage gain of the year, plenty of people wondered if takeover chatter was responsible.
"I don't think so," says Stacey Briere, chief options strategist for the Susquehanna Financial Group. Briere notes that investors that day bought 10,000 Aug. 10 calls, expiring Aug. 20. The calls, of course, are a cheaper and therefore less risky way to bet that BEA shares will exceed $10 by the expiration date. Presumably, buyers are thinking that the company will have some good news when it reports earnings on Aug. 17, she said.
Sun Trust Robinson Humphrey analyst Terry Tillman also gave the stock a hand, upgrading to buy on Monday, saying it looks like BEA's North American sales may have finally turned a corner. He noted, however, that he is making a call on the back half of the year, not the July quarter. Sun Trust does not have an investment-banking relationship with BEA.
Now that Oracle has grabbed Indian-owned I-flex Solutions, there's speculation that rival
could be in play. "It's a big target. You have to think that SAP is interested," says Marlin's Maxworthy. Like I-flex, the Geneva-based company, which went public in 2001, makes software for banks, an increasingly important vertical for both Oracle and SAP. Maxworth think that Oracle could even be interested, if only to block SAP. Shares are traded on the Swiss Exchange.
Next week, the market offers fewer data points as the earnings flow subsides and investors await Tuesday's confirmation that the
has at least one more rate hike in it. But earnings from
on Tuesday and
on Thursday will loom large for tech investors. Recent market data from IDC continues to suggest PC demand is as strong as ever, prompting some analysts to predict Dell will at least beat top-line estimates.