Since the beginning of 2012, Oracle Corporation (ORCL) has acquired more than 12 companies; from the talent management software company Taleo to the recently acquired Acme Packet, Inc (APKT). If we dig into history, the company has spent around $50 billion on more than 80 acquisitions in the last seven years. This has transformed it, from a business software company into an infrastructure supplier offering cloud computing and networking solutions.
Over the years, the average deal size has come down and the company is targeting mid-sized companies as compared to the mega deals, which are generally troublesome. Along with these acquisitions, the company has taken a lot of criticism for its spending expedition. But, I feel most of the acquisitions fit in well for Oracle resulting in better profits and increased shareholder value. This is quite apparent from the fact that Oracle's revenue has grown at an annual rate of 20% in the last five years.
Let's dig into its recent acquisition in detail and find out what threats and opportunities it brings to Oracle.
The latest in the list!
Last month, Oracle acquired Acme Packet for about $1.9 billion in a cash deal. Acme Packet, a leader in the SBC (session border controller) market, has a customer base of around 1900 service providers. Acme's stock had jumped around 55%, when the investors were highly positive about its quarterly results. The shareholders got the news of this buyout as a surprise and will now get $29.25 per share, which includes a premium of 22.2%. However, looking at Acme's $360 million cash balance, I feel the price offered by Oracle is quite modest.
On the other side, Oracle sees this deal as a missing link in its overall solutions portfolio. This deal clearly reflects the blending of IT and telecom, which is driving major changes in the competitive landscape. It will automatically put Oracle in the next generation IP core networks, across all the three segments i.e. fixed-line, mobile and enterprise, supporting the company's presence in the software defined networking (SDN) market. This is a huge opportunity for Oracle to capitalize, as the SDN market is expected to become a $2 billion market by 2016 (as per IDC).
I feel, with Acme's acquisition, Oracle has come into a position where it can offer a complete package of software and hardware solutions. Capitalizing on its acquisition of Sun Microsystems (acquired in 2010), Oracle can carry Acme's technology in a better way. Also, this acquisition will boost the company's hardware sales, which is not in its best shape currently. The deal is expected to close in the first half of 2013.
The upcoming battle - Oracle versus Cisco!
The acquisition will put Oracle into direct competition with Cisco Systems, Inc. (CSCO). Cisco has already spent a considerable amount in acquiring telecom expertise. The latest one was its acquisition of Meraki to expand its reach into Wi-Fi networks, switching and security services managed via cloud. Meraki has a solid base of 20,000 customers in more than 140 countries, which has provided an opportunity to Cisco to expand its revenue streams. Via this acquisition, Cisco is targeting small and mid-sized enterprises that are easy to manage in terms of IT resources.
However, the recent acquisition from Oracle will keep Cisco on its toes, as both the companies are aiming at the next generation LTE market. Even though in internet communications, Cisco is leading the race but, Oracle is constantly crashing into its market. On the one side, Oracle also has advantage of Acme's lead in the SBC with around 40% share. On the flip side, Cisco has more enterprise leverage and can expand its presence in this market with product upgrades.
Currently, both Oracle and Cisco have a sound cash position to continue with the acquisitions to enhance their profiles. And, the recent acquisitions make it more interesting to keep an eye on how well these companies utilize these technologies to grab more market share.
The bottom line
I believe Oracle's shareholders have nothing to worry about, as the acquisition strategy of the company keeps the growth alive. Even though the recent deals are small, they allow the company to diversify its operations and one can never forget its strong track record of execution.
Apart from utilizing its huge cash balance in acquisitions, the company has also started with share buyback plans to support the shareholder's return. In 2012, Oracle purchased about $10 billion of its shares. This will further boost the shareholder's earnings in the future. Overall, Oracle is performing well on both operational (acquisitions) as well as financial basis. Though I don't expect any remarkable return in the short run, the long-term appeal of the stock is attractive. I recommend a buy on this stock.