Well, it took Oracle (Nasdaq: ORCL ) CEO Larry Ellison all of nine months to broker yet another major deal. This time, the target is Siebel Systems (Nasdaq: SEBL ) . The ailing maker of customer relationship management software yesterday agreed to be purchased for $10.66 per stub, or $5.8 billion.
There are so many ways to analyze this deal. Siebel has $2.2 billion in cash on the books, but cash flow has waned dramatically in recent years. A check of the most recent numbers at Yahoo! Finance pegs trailing 12-month earnings before interest, taxes, depreciation, and amortization -- otherwise known as EBITDA -- at $176.14 million. Compare that with its current enterprise value of $3.13 billion, and you've got a multiple of 17.8. That would be about on par with industry counterpart SAP (on a multiple basis), but it bears mentioning that analysts were expecting Siebel's earnings growth to be 10% annually over the next five years, lagging both the S&P 500 and the rest of the software industry.
So is the purchase expensive? Some might argue it is. Sure, the multiple seems a bit expensive, as mentioned. But we all knew that Siebel was a fixer-upper, and I believe there's a lot of bandwidth here. The only question is whether the fixing can be done for a reasonable cost. I think it can. A big reason why is Siebel's base of 3.4 million customers.
Oracle is spending less than three times sales to acquire each one of them (once cash is accounted for), which is about as cheap as you get in a tech buyout of any size. (It paid slightly more than three times sales for PeopleSoft.) Yet, as good as that is, the real beauty of it is that Oracle should be able to retain the vast majority of these accounts and still squeeze significant savings out of Siebel's operating structure. Take a look at the numbers. According to Yahoo! Finance, Oracle most recently boasted a 77.5% gross margin and a 37.1% operating margin. Now contrast that with Siebel, which had a 66.9% gross margin and -- gulp -- a 6.72% operating margin. Clearly, there's room for at least some cost cutting. Probably a lot of cost cutting.
So, if this deal passes regulatory muster, Oracle will have gained an enormous base of new customers. That would add to its already massive maintenance revenue stream and provide new opportunities to sell its database. And if the company does any meaningful innovation to challenge up-and-comer Salesforce.com (NYSE: CRM ) , there could be nice revenue and earnings gains in future years. Hmmm, relatively low risk and decent upside. That's a deal that I, for one, can really appreciate.
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- Siebel was a stock in search of an investment thesis. Larry Ellison thinks he's found one.
- Looks like Oracle and Microsoft (Nasdaq: MSFT ) will be going at it again.
- Don't expect the database king to keep Siebel's newly funded dividend.