Oracle dipped its toe in the VOIP/Unified Communications sector last month with the acquisition of Acme Packet (APKT). When the deal was announced even the most steadfast, Larry Ellison Oracle believers were shaking their heads questioning the rationale of the deal. Why would Oracle get into the telecom equipment market and why with a niche company like Acme Packet? After reviewing Oracle's history of entering new segments, it appears as though they are following their tried and true method of dipping their toe, integrating an early leader and then consolidating the space. I believe APKT acquisition was the first step in consolidating the VOIP/UC space and an acquisition of Broadsoft (BSFT) will happen over the next six to twelve months.
Background- Acme Packet and Broadsoft's Close Relationship
BSFT and APKT both entered the Voice over Internet Protocol (i.e. VOIP) world around the same time in 2000. They immediately forged a partnership and have worked closely together ever since through jointly integrating, marketing, selling, and servicing IMS solutions. Why do they need each other? APKT brings their 'Net Net' session border controller (abbreviated SBC) technology while BSFT provides their 'Broadworks' VOIP application server to the table. The session border controller's primary task involves first establishing a connection (the session) between a user and his target destination whether it be the public Internet, a private IP network or a SIP trunk service provider. Then, the SBC manages the session by delivering the relevant data whether it be voice, data, or video. The SBC finally terminates the session. All along the SBC acts like an application aware firewall providing the necessary security along the way by inspecting the packets. BSFT's 'Broadworks' voice application server allows features like: integrated messaging (voicemail, text, email), conference calling, call forwarding, etc.. BSFT solution applies to the voice, video and data that the SBC is routing. As service providers' core business of providing voice connections becomes increasingly commoditized, they are focusing users on features provided by BSFT like "follow me" where all of a user's phone numbers (work, home, mobile) are seamlessly integrated. An SBC and a voice application server go hand in hand for enterprises thus the close relationship between APKT and BSFT historically. In addition, both BSFT and APKT target the same customer base- service providers who then market these services to enterprises and consumers.
Oracle Pursues APKT, BSFT Next?
December 2011, APKT's board decided to hire Qatalyst Partners to help them assess strategic alternatives, quick translation sell themselves. Qatalyst narrowed the field to 7 possibly interested parties according to the proxy filed. Qatalyst contacted 6 unnamed parties and Oracle, unfortunately all spurned the offer and expressed no interest. Surprisingly, August 31, 2012 Oracle (ORCL) contacted APKT to express interest in acquiring the company. Ultimately after back and forth between ORCL and APKT, they agreed to $29.25 takeout price, a 22% premium to the prior day's closing price.
The importance of ORCL contacting APKT is that they clearly have a strategy to make inroads in the VOIP/Unified Communications world vs. opportunistically acquiring a cheap asset. Whether Oracle is responding to Microsoft's (MSFT) enormous success with Lync and Sharepoint or Cisco's (CSCO) inroads with UC, Oracle has decided in needs a viable solution in Unified Communications and VOIP. As a follower of ORCL's strategic acquisitions for well over a decade, Oracle does not do anything halfhearted. When ORCL decided they needed assets in the Software as a Service (abbreviated SAAS) space, they slowly picked away at prime assets such as: Endeca, Rightnow, Taleo, and Eloqua. And when Oracle rolled up the applications space they acquired Peoplesoft then Retek, Seibel, Portal Software, Agile Software and Hyperion Solutions. If history is a guide, ORCL seems poised to roll-up the VOIP/UC space and a application server company like BSFT would make a lot of sense given their close working relationship with APKT and the seamless integration between the products. BSFT would be a good fit with Oracle's core strength of providing software applications. Oracle is a very savvy buyer and likely will take advantage of BSFT's recent weakness related to their cautious 2013 guidance.
BSFT and APKT stocks both were struggling and priced similarly before ORCL's acquisition. Due to cautious 2013 guidance BSFT's stock was hammered down nearly 50% post its Q4 report. BSFT's stock has recovered this past week due to insider buying and positive sector news from Ciena (CIEN); however, it still trades at a discount to nearly every comparable high growth software peer and with no acquisition premium. Its never a smart move to invest in a stock solely with hopes of an acquisition payday but there is little if any acquisition premium in the stock at current levels. Absent an acquisition, BSFT is still a great long as they remain poised to take advantage of a big 2014 for VOLTE and UC as I detailed in my earlier note.
When Qatalyst and APKT were arguing valuation to ORCL they used the valuation of comparable peers- BSFT, Aruba Networks (ARUN), Riverbed (RVBD), and F5 Networks (FFIV). If you applied the revenue multiple Oracle acquired Acme Packet , i.e. 5.5x EV to '13 revenue, BSFT would trade at $36, representing nearly 40% from the most recent close. Note APKT is also a much larger company ($1.7 billion EV) vs. BSFT ($630 million EV). BSFT also has something ORCL covets- predictable, high margin recurring maintenance revenue. Based on 2012 numbers, BSFT has 35% of its revenue in the form of subscription and maintenance revenue. Bottom line, assuming APKT closes on schedule 1H'13, don't be surprised if/when Oracle's next move is an acquisition of BSFT shortly thereafter.