Oracle - Long Awaited MICROS Deal Finally Materializes

| About: Oracle Corporation (ORCL)


Oracle reported a relatively soft set of results on Friday.

It now announces a $4.6 billion acquisition of MICROS Systems, bolstering cloud and enterprise offerings.

The deal makes perfect sense, ensuring modest topline revenue growth in the coming year as the business remains in transition.

I remain a buyer in the $36-$38 region.

Oracle (NASDAQ:ORCL) has finally announced the much anticipated deal to acquire MICROS Systems (NASDAQ:MCRS) in a deal in which Oracle acquired the provider of point-of-sale hardware and related services.

The deal gives Oracle an entry point to provide cloud-based services, software, hardware and ERP software to many customers of MICROS and should have the potential to drive meaningful revenue synergies in the long term.

I remain a buyer on dips.

The Deal Highlights

Oracle has finally reached a definitive agreement to acquire MICROS Systems in a highly anticipated deal.

Under the final terms of the deal, Oracle will pay $68 per share in cash which pegs the value of MICROS at $5.3 billion, or $4.6 billion after subtracting the net cash holdings of the firm.

MICROS provides point of sale technology to hotels, food & beverage facilities and retailers. It provides both software and hardware and has embraced its global cloud solutions.

The board of MICROS has unanimously approved the deal which is expected to close in the second half of 2014.

Strategic Rationale

MICROS' solutions are deployed at more than 330,000 sites while it employs 6,600 workers at the moment.

Combined both firms will focus on the acceleration of innovation and business transformation of its customers, aiding them to remain competitive in today's rapidly changing world. Technologies like cloud, mobile, social, big data and the internet of things will be employed to aid customers allowing them to compete effectively going forwards.

Specific examples of these services include intelligent cards hotels, targeted price offerings from retailers, cloud-based restaurant management, among others.

Oracle business applications, technology and cloud will be combined with the specific applications developed by MICROS. Combined the business unit within Oracle which focuses on the servicing of organizations will count 18,000 workers. Oracle furthermore stresses that the unit will spend $500 million on research & development efforts.

No words are mentioned regarding potential cost or revenue synergies while there should be real potential to save costs and boost incremental revenues.

Financial Implications

In May of this year, MICROS reported its third quarter results. The company posted a 10.7% jump in revenues on a year-over-year basis, posting trailing revenues of $1.34 billion.

Trailing net earnings came in at $168 million. This means that the $4.6 billion reported price tag values operating assets of the firm at 3.4 times annual sales and 27-28 times annual earnings.

On the 16th of June, shares of MICROS jumped by 14.9% on rumors about a potential deal. Compared to the closing price of the 15th of June the $68 deal implies a premium of 17.8%.

Oracle's CFO Safra Catz mentioned in the press release that the deal is immediately accretive to non-GAAP earnings. The release failed to specify by how much this deal would add to earnings.

Oracle's Valuation

Last week, Oracle released its fourth quarter results. Investors were not too pleased with the results despite a 3% increase in its annual revenues to $38.3 billion, while it reported net earnings of $11.0 billion.

At $41 per share, equity in Oracle is valued at $190 billion. The company operates with a net cash position of $14.6 billion despite having access to nearly $39 billion in cash. Following the deal, Oracle's revenues will approach $40 billion per annum as earnings will increase towards $11.2 billion.

Oracle's net cash holdings will decline to about $10 billion following the deal, valuing operating assets at $180 billion. This values the pro-forma business at 4.5 times sales and 16 times earnings.

Oracle's $0.12 quarterly dividend provides investors with a 1.2% dividend yield.

Serial Acquirer

The deal was already anticipated after rumors about a possible deal broke out last week. Furthermore analysts were pressuring Oracle to use some of its huge cash balances to acquire growth, gaps in its cloud offerings and more effectively deploy its cash.

At least this deal will add 3-4% in annual revenues, while modestly improving the overall growth profile of Oracle. The announced deal is the largest after Oracle acquired Sun Microsystems for $5.6 billion in 2009. The company has however made numerous smaller acquisitions, putting the total acquisition count at roughly a 100 over the past decade.

Shareholder Takeaway

I must say that I like the deal which I don't regard as very expensive, especially as I believe there is quite some potential for both cost and revenue synergies, although not specified.

The move into the hotel and hospitality systems will provide the company with a strong point to sell other systems as well as ERP systems to the customers of MICROS. What should be pointed out is that the deal is not 100% sure yet with shares trading at the offer price. Some analysts believe a potential counter-bid could be made by rivals including SAP.

Last week, I concluded that Oracle's sell-off seemed an overreaction given the comforting outlook. I noted that future deals and new products should drive growth forward, and the first business day following the earnings release Oracle already announced this deal.

I concluded and hoped for a retreat towards $36-$38 per share, which would provide me with an excellent entry point. Nothing fundamentally has changed ever since, prompting me to reiterate that conclusion.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.