Recent Acquisitions Suggest The Cloud Sector Presents Opportunities

by: Richard Saintvilus

In a recent article I discussed how fierce competition forces opponents to dig into their pockets and spend cash they otherwise had not considered spending. We first saw evidence of this when Apple (NASDAQ:AAPL) seemingly forced Google (NASDAQ:GOOG) into what I then considered a panic purchase of Motorola Mobility (NYSE:MMI).

On October 24, database giant Oracle (NASDAQ:ORCL) issued a press release informing that it had acquired RightNow (NASDAQ:RNOW), the cloud-based customer experience suite designed to help organizations deliver customer experiences across the web and social networks. Initially I questioned the merits of this deal but then I studied it a bit closer and realized that for Oracle, it makes perfect sense – especially when considering how it was able to successfully leverage its Sun acquisition from a year ago.

By paying $43 per share in the all cash deal for RightNow, Oracle is paying only a 20% premium above RightNow’s closing price as of the announcement - which comes to a deal valued at roughly 1.5 billion. Having considered its current net cash position of $16 billion and its $5 billion of free cash flow, it is hard to assess this transaction as an enormous deal, speaking only on its cash value, not necessarily potential. But more importantly than that, it forced me to consider other M&A possibilities as these things tend to have a domino effect. In that article I reminded investors of the following:

Clearly Oracle remains ahead in the race. It will be interesting to see what other M&A speculation surfaces as a result of this deal. I know for certain that Hewlett-Packard, Microsoft and IBM (IBM) are paying attention.

This week we’ve learned just how swiftly the dominoes are moving. On Tuesday SAP (NYSE:SAP), a fierce rival to Oracle, announced that it had acquired SuccessFactors (NYSE:SFSF), which is arguably the best software-as-a-service (SaaS) company that deals with HR services. It rivals names such as Cornerstone OnDemand (NASDAQ:CSOD) and Taleo (NASDAQ:TLEO). The deal announced is reportedly valued at $3.4 billion in cash and remarkably SAP is paying a hefty 52% premium. But the question is, is it worth it? I described the announcement this way:

For SAP, I have to say that this deal makes sense because it strengthens its strategy of growing its business intelligence. It realized it was lagging in that category behind not only Oracle, but IBM as well. The question now becomes is the buying spree over or will another firm within this space respond with another acquisition? While IBM is established enough to withstand any temptation outside of its strategy, it will be interesting to see how firms such as Microsoft and HP chose to respond.

I would have to say it seems I have given IBM (NYSE:IBM) too much credit, but I can’t fault it for not resting on its laurels. With its long history and solid track record, it is hard to question any decision it makes. While I expected Hewlett-Packard (NYSE:HPQ) or Microsoft (NASDAQ:MSFT) to make the next move, on Thursday, IBM reminded investors that it was still in the game with its purchase of DemandTec, a firm that specializes in retail marketing and software merchandising.

The announced deal is said to be valued at $440 million in cash. But it should serve as a reminder of just how valuable the cloud market is projected to grow, leading me to speculate that in the years to come, the market will eventually consider “the cloud” as its own sector. Leading tech names such as Cisco (NASDAQ:CSCO) and Juniper (NYSE:JNPR), which specializes in providing the backbone to the cloud, will stand to benefit a great deal from its expansion.

Investors may also consider a company such as Level 3 (LVLT) which is also well positioned to capitalize by leasing out its global network. But opportunistic investors as well as those who might be looking for aggressive growth and willing to take some risks might also consider smaller unknown cloud-based names such as Kenexa (KNXA), Netsuite (NYSE:N) or the aforementioned Taleo.

Disclosure: I am long AAPL, MSFT, CSCO, ORCL.