For Oracle (NYSE:ORCL), the past several years have been defined by an ambitious acquisition strategy engineered by the business-software giant’s outspoken and abrasive CEO, Larry Ellison. Investors like the growth: thanks to a recent surge, Oracle shares are at their highest level in a decade.
While Oracle has spent well over $20 billion buying software makers large and small in recent years, it’s worth noting that the rambunctious Ellison’s latest big deal – the $7.3 billion purchase of Sun Microsystems early this year – has taken the software provider where it’s never before competed.
Sun, known for its server computers and related data-storage equipment, marks Oracle’s first foray into the hardware and computer-chip markets. Some people initially figured Ellison was simply after Sun’s valuable “Java” software product, but Ellison is clearly intent on keeping the whole Sun-chilada: Oracle, he contends, can dramatically improve Sun’s historically hit-or-miss profit margins, and the integration of hardware and software expertise promises to better position Oracle for a changing tech market.
If that proves to be the case, and the Sun deal helps Oracle outpace forecasts, the enthusiasm with which Wall Street has greeted the Oracle/Sun combination might turn out to be justified. Might.
More expansion lies ahead, most likely. Just this week, Oracle announced a relatively small-beans $1 billion cash purchase of e-commerce software provider Art Technology Group (ARTG). That’s in line with scores of other industry acquisitions Oracle has made.
But Ellison, in between pursuing acrimonious intellectual-property litigation with software arch-rival SAP and Google (NASDAQ:GOOG), has been signaling lately that he’s interested in making more outside-the-software-box acquisitions. Valley matchmakers swooned recently, after he specifically mentioned the computer-chip group as a segment of interest.
Ellison’s company, which historically pays cash for its acquisitions, still has plenty of green.
It helps that the corporations, governments and other large clients that make use of Oracle “enterprise” software to manage their sprawling operations are pretty stable customers. Oracle slugs it out with SAP and/or Microsoft (NASDAQ:MSFT) in many enterprise areas, of course, but it’s less exposed to the more volatile consumer side of the software business.
The recession dampened sales, particularly to big clients in the financial sector, but those markets are rebounding. And despite seasonal swings, the revenue contribution from earlier acquisitions tends to keep Oracle in growth mode.
Cash flow is strong, so even though the company’s long-term debt has been rising as it paid out $10.3 billion for PeopleSoft (2005) and $8.5 billion for BAE (2008), debt-to-equity levels have remained stable.
In Oracle, potential investors face two questions. One is numbers-based: YCharts’ proprietary valuation system suggests that, despite Oracle’s robust fundamentals, the stock is overvalued. The p/e’s at about 23.
If Oracle manages to squeeze more profit out of Sun in coming years than it and others first projected, of course, the stock may support a bigger multiple than it currently appears to merit. The second question hanging over Oracle shares is harder to calculate: Will Oracle overreach?
Synergies are swell. Economies of scale? Can’t beat ‘em.
The Sun deal remains rife with question-marks for now. Oracle has boosted its restructuring set-asides for the combination even as it brags about Sun’s future potential.
But galloping growth and expansion beyond the company’s zone of historical expertise could lead to a fall. If Ellison goes shopping outside his home sector to buy chip companies or another hardware maker, as he seems determined to do, he will be increasing the odds that Oracle will eventually make an acquisition blunder.
Oracle’s current price doesn’t reflect the possibility that the company may one of these days acquire a fixer-upper it won’t know how to fix.