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Shares of Oracle (ORCL) have risen some 4.5% so far in 2013. The provider of enterprise software services and computer hardware devices benefited of a strong general market sentiment. On top of that, Oracle recently announced the acquisition of Acme Packet (APKT), a leader in session delivery network solutions.

The Deal

Oracle announced that is has agreed to acquire Acme Packet, a leader in session delivery network solutions for the delivery of next-generation voice, video, data and unified communication services across IP networks. Oracle will pay $29.25 per share in cash for every share of Acme, thereby offering a 22.2% premium to Acme's shareholders. While Oracle pays a substantial premium, shares of Acme are still trading 65% below the high of $83 set as recent as April of 2011.

The deal is a rather small addition for Oracle as the firm will have spent $2.1 billion to acquire Acme, or $1.7 billion net of cash.

Combined, both firms expect to accelerate the migration to all-IP networks by enabling secure and reliable communications from any device, across any network. Oracle and Acme can help providers and enterprises to meet the increased requirements from corporate customers.

Oracle President Mark Hurd commented on the deal, "The proposed acquisition of Acme Packet is another important piece in Oracle's overall strategy to deliver integrated best-in-class products that address critical customer requirements in key industries."

At the day of the announcement of the deal, Acme presented its annual results. For the full year of 2012, the company generated revenues of $274.4 million on which the company net lost $5.2 million.

The $1.7 billion deal values Acme at 6.2 times annual revenues. The rationale behind the deal is mostly strategic and to acquire new technologies and practices to keep innovation going. Acme will add less than 1% to Oracle's annual revenues and therefore will not materially impact the business.

The board of directors of Acme has already approved the transaction which is expected to close in the first half of 2013. The deal is furthermore subject to normal closing conditions including shareholder approval and regulatory approval.

Growth By Strategic Acquisitions

Oracle has been fueling growth by acquiring small-to-medium sized businesses, thereby avoiding mega-deals which often work disruptive. Over the past decade it bought some medium-sized competitors including PeopleSoft, Siebel Systems, BEA Systems, and Sun Microsystems. The average deal size came down in recent years, but in 2012 alone the company bought 11 other companies including Taleo (NASDAQ:TLEO), Eloqua and Virtrue in order to expand operations in social media, big data and cloud-based solutions. The deal with Acme Packet is the first one in 2013.

Valuation

Oracle ended the second quarter of its fiscal 2013 with $33.7 billion in cash, equivalents and short term investments. The company operates with $19.8 billion in short and long term debt, for a net cash position of approximately $13.9 billion.

For the first six months of its fiscal year, Oracle generated revenues of $17.3 billion on which it net earned $4.6 billion, or $0.94 per diluted share.

The market currently values Oracle at $164.8 billion, which values operating assets at $150.9 billion. At this pace Oracle could generate annual revenues of $37 billion on which the firm could earn $10 billion. This values operating assets at 4.1 times annual revenues and roughly 15 times annual earnings.

Oracle accelerated its dividend for the first three quarters of the fiscal year of 2013 into December 2012, ahead of the fiscal cliff discussions. The regular quarterly dividend of $0.06 per share, results in a mere 0.7% dividend yield per annum.

Some Historical Perspective

Shares of Oracle have seen decent returns over the past year in line with the rest of the market. Shares were trading in the high-twenties at the start of 2012 and fell to $25 by May of the year. From that point in time, shares gradually recovered to $35 at the moment. At these levels, the all-time-highs of $45 set during the internet bubble remain within reach.

Between its fiscal 2009 and 2012, Oracle grew its annual revenues by 60% from $23.2 billion to $37.1 billion. Earnings almost doubled from $5.6 billion to $10.0 billion over the same period of time.

Investment Thesis

Shareholders of Oracle have no reason to complain with their management over the past years. Unlike many other big technology names the firm has consistently grown revenues and earnings under command of CEO Larry Ellison. Other firms like Hewlett-Packard (HPQ) ran into big trouble as a result of too large and too expensive acquisitions, while investors are also doubting the strategies of Cisco Systems (CSCO) and Intel Corporation (INTC).

Oracle's smart acquisition strategy keeps innovation and growth going. Yet the deals are small enough to avoid that the firm's culture and organizational structure becomes dysfunctional. Furthermore it allows Oracle to diversify operations in a range of technologies and industries at a relative low cost. The last deal with Acme Packet suits within the strategy, valued at 6.2 times annual revenues, a premium of 50% compared to the firm's own valuation.

Besides using its massive cash balances to fund acquisitions, Oracle has started to repurchase its own shares. Over the past year, the firm repurchased roughly $10 billion of its own shares, almost 6% of its total shares outstanding.

All in all, Oracle is performing very well on both an operational basis, by means of its acquisitions, and with its financial strategy. At these valuation levels, at 15 times earnings, the majority of the upside potential is gone for the short to medium time.

I like the long term appeal of Oracle's shares, but I do not expect speculator returns in the short term.

Source: Oracle - Sound Acquisition Strategy Continues To Pay Off