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Is New Oracle Partnership A Match Made In Heaven Or Hell?

Alex Jordon profile picture
Alex Jordon

Will Oracle (NYSE: NYSE:ORCL) investors benefit from the partnership of former competitors Oracle and Salesforce.com (NYSE: CRM)?

According to principals from both companies, the answer is yes. Oracle's Larry Ellison and Salesforce.com's Marc Benioff are both saying they are joining forces to integrate their technologies because it's what their customers want. According to reports in Forbes and by The Motley Fool, customer needs are the driving force behind this partnership, which some stock analysts are calling ironic and others have called an "unholy alliance," due to the acrimony that used to exist between the two companies.

Ellison said in the Forbes report that customers of both companies - mostly software companies and app developers - use products from both companies. He explained that without the new partnership, these customers would have to hire a third party to integrate the products, so it makes good business sense for the two companies to do the integrating and deliver them as products. Forbes also explained that any integrations done by a third party would likely be inferior to, and yet cost more, than the integrations done by Oracle and Salesforce.com, which is another way customers - and ultimately shareholders - will benefit from the new partnership.

Cloud computing is the primary arena where Oracle and Salesforce.com are focusing on, which they and stock analysts say is the area that will generate the most growth in today's market. Ellison has been quoted as stating that hardware is also an expected growth area for Fiscal Year 2014.

Since the partnership positions Oracle for growth, that is also good news for investors, and given the company's history of steady (but sometimes small) revenue gains every year, and gains in earnings per share annually, the numbers seem to bear out Ellison's and Benioff's predictions. According to Oracle's filings with the

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Alex Jordon profile picture
Alex Jordon Reducing investment costs can have a major impact on expected returns in your retirement and/or investment portfolio, more so than many people realise. Investing in a fund where the manager is paid big bucks to speculate on individual stocks and market timing (a technique known as "active" management) is not only hit-and-miss in terms of the final results, it is also expensive. Studies show that 7 out of 10 Active managers fail to achieve their remit of beating their index benchmark. My hobbies are reading, social networking. Finance and math are my favorite subjects.

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Comments (13)

As one of the many who think salesforce's valuation is a joke, this deal seems to have put another boost to their share price. I've been away for a few weeks so haven't had a chance to really read into this deal, but seems like bad news for those patient souls waiting for salesforce sp to implode - or am I missing something?
A few points (full disclosure: I am an Oracle shareholder):

1. Partnering with Salesforce is less risky and costly than buying the company outright. Plus if that is ever down-the-road, this gives Oracle an opportunity to test-drive the relationship before committing billions to funding an acquisition.

2. There was a recent WSJ article on the partnership stating that customers of both Oracle and Salesforce were not merely anticipating greater interoperability, but also more innovative offerings as a result of the relationship. So hopefully this will strengthen Oracle's competitive position in cloud.

3. As far as the continued attempt to raise red flags over the fact that earnings are increasing faster than revenues. This is not alarming nor concerning IF you understand Oracle's business model. It is a model heavily reliant on a predictable revenue stream which is not only increasing YoY but also much higher in profit margin than the other revenue sources. And that is the support revenues.

Here is what the most recent 10-K states about this phenomenon:

"Software license updates and product support revenues, which represented 46%, 43% and 42% of our total revenues in fiscal 2013, 2012 and 2011, respectively, is our highest margin business unit. Our software support margins during fiscal 2013 were 88% and accounted for 74% of our total margins over the same period....

...substantially all of our customers purchase software license updates and product support contracts when they buy new software licenses, resulting in a further increase in our software support contract base. Even if new software licenses revenues growth was flat, software license updates and product support revenues would continue to grow in comparison to the corresponding prior year periods...since substantially all new software licenses transactions result in the sale of software license updates and product support contracts, which add to our software support contract base..."

To put it another way: Oracle's 'product mix' overtime is skewed towards increasing the proportion of 'high margin' products as a percentage of that product mix and this phenomenon is a natural outgrowth of the subscription model and should be expected to continue into the foreseeable future.
Joining forces of ORCL and CRM makes perfect sense. Customer relations management was a weak spot in ORCL's database-oriented B-to-B offerings. That's why some smart ORCL associates saw a chance to venture out on their own and found CRM. Larry Ellison has been a large shareholder in CRM and thus would hurt himself, if he undermined CRM. But forming a partnership between both parties, who have intimate knowledge of each other's business, goes a significant step further. It's a win, win, win, win strategy all around for ORCL, CRM, their customers and, last not least, both company's shareholders.
A few years ago Siebel was a clear leader in CRM. Then Oracle took over Siebel and Siebel subsequently lost the top spot to Salesforce and SAP. Depending on what aspect of CRM you evaluate (check out gartners quadrants) even Microsoft Dynamics CRM moved past Siebel (Oracle). Maybe Oracle can repeat this magic with taking over Salesforce.

The clear winner of this transaction would be Marc Benioff, who can then leave the company with a two digit billion dollar amout that would certainly help him to forget all of Salesforces problems with its lack of profitability. A problem Siebel by the way never had.
banmate6 profile picture

This is exactly what I am thinking. Benioff already cashed in half a billion $ with no GAAP earnings. I think this speaks volumes on his priorities. An eventual acquisition by Oracle is a win-win for all concerned.

Benioff cements his legacy as a pioneer in popularizing SAAS & can do other things. Oracle gets a strategic acquisition, nicely extending its capabilities in extending its cloud portfolio.

I really think resistance is futile, no pun intended. Oracle itself will start to deploy cloud based Siebel in a significant way. Vendors like MSFT, IBM, and SAP are in full bore here, offering a variety of other hosted services & integrated apps as well...and these companies are highly profitable.

Lastly, I have to imagine that Larry and Mark can and do chat on a dime. Mark worked for Larry and received support from him in establishing SalesForce. Business is business. They have a good history. They'll do what makes sense.

Hell, maybe Larry grooms Mark as his successor? So many ex-Oracle folks are at SalesForce anyway.


I of course could be wrong. But that means SalesForce must grow into something googlesque, based on current valuations. I just don't see it.
The Grid profile picture
From what I understand CRM runs on a single gigantic Oracle database that all customers share. (Someone correct me if I am wrong).

Many customers don't run CRM on an island so they need to extract the data and integrate it with their other core systems.

So perhaps from a technical standpoint a formal alliance with Oracle would make integration much more easier, like piping data in and out of Oracle's ERP system.
banmate6 profile picture

You are basically correct about CRM apps running different clients on the same underlying database schemas. This is one essential aspect of simplifying maintenance, provisioning, and, perhaps most importantly, the concept of so called multi-tenancy. CRM is an application class that lends itself to multi-tenancy and, to use another buzz word, elastic computing, scaling quite nicely.

The extraction and manipulation of underlying data is a key challenge. It is especially a physics issue and maintenance issue. Even with open cloud standards, accessing data across multiple vendor data centers involves slow data shipping restrictions. You could write transaction based systems, but not really any big data analytic systems.

So yes, integration like you state seems inevitable. 1 stop shopping in my opinion will prove to be the norm. Again, this is where I feel the traditional vendors, with their range of applications and vertical cloud stack expertise will slowly but surely win.
guidothekp profile picture
As a owner of Oracle stock, I would ask the following question. If there were efficiencies to be realized by combining forces with CRM, why did Oracle try to go at the cloud on its own? Why has it given up now?

If cloud computing is such a high margin business as we are told, why is CRM not able to make any profits? If the margins are high, why would ORCL simply vacate the space to CRM?

I think the answer lies in the fact that a] CRM has trained users to expect cheap stuff b] the margins are not there. ORCL has a super sales force and they are having a tough time getting customers to pay for stuff that is cheaper or even free on the cloud.

So ORCL has effectively yielded the ground to CRM because the winner will get Pyrrhic victory. The story about wringing out efficiencies, IMO, is bogus and is simply a face saving maneuver.
banmate6 profile picture

Good points.

At some point, prices must increase in order to make SAAS sustainable. In my view, this is a game newer companies will find difficult winning. For one, they can't sustain bleeding while traditional vendors like Oracle, SAP, IBM, and MSFT continue to make immense profits.

I also think a day of reckoning is coming with integrated SAAS applications. It becomes increasingly untenable for a customer to have multiple SAAS providers. What about identity management? What about accessing underlying schemas? What about developing advanced analytical applications off of multiple application data sources?

SalesForce is basically CRM. WorkDay is basically HR. The traditional vendors can eventually provide 1 stop shopping, still make a profit, and gradually crush or acquire the SAAS rivals.

Also, traditional enterprise computing is not going away. At best, some things might be done on a private cloud, but some applications must stay in house. Therefore, again it is an advantage to offer a range of integrated IAAS, PAAS, and SAAS services which complement any on site enterprise software.

CIOs are not suddenly going to make things more complicated. They already have deep & trusted relationships with the traditional vendors. To succeed among the established powers, one has to scale and/or innovate on the level of an Amazon or Google. I just don't see this in most of the SAAS only companies that specialize in 1 - 2 applications.

At any rate, I just won't put my money in SalesForce, WorkDay, or even Amazon for that matter. Google is too richly valued. Oracle is at fair value.
Illuminati Investments profile picture
"Pyrrhic victory", what a great term for CRM's strategy of growth at any cost.
The Grid profile picture
banmate yes I am seeing alot of overlap and integration problems that make things a bit more difficult to manage vs. a centralized system where all that overlap is eliminated.

A traditional centralized system is harder upfront to get going with functionality but scales very well. The Saas stuff is very easy to get setup and its functionality is easy to extend but like you said it starts turning into a spiderweb of inter-dependency management.

There are SAML identity manager providers specific for the cloud, but not everything is standardized yet.
banmate6 profile picture
Time will indeed tell. But I think Larry will either acquire of defeat SalesForce. Oracle makes money, lots of it. Oracle has IAAS & PAAS components of the cloud stack, as well as lot of increasingly integrated SAAS applications.

SalesForce on the other hand makes no money and is niche application player. It's troubling that the company is attempting to grow revenue via acquisition, putting it further into debt. It now is fully in bed with Oracle...an Oracle that also is bringing SAAS CRM to bear, not to mention many other apps. I just don't see SalesForce finding new growth to justify its crazy valuation.

It's not a question of "if", but rather of "when" wall street will normalize the SalesForce valuation. That's when I think Larry will make his move. I could be wrong, but something tells me 10 years from now, Oracle will remain thriving...with traditional vendors like IBM, SAP, Microsoft and some newer ones like Google & Amazon...but that singular minded SAAS companies like SalesForce and WorkDay will be gone.

Regardless, I find Oracle much more compelling buy than SalesForce. But I'm primarily a value investor and so biased.
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