Oracle: Genius, or Unbelievably Stupid?

Oracle  (Nasdaq: ORCL  ) chief Larry Ellison apparently surprised a lot of people on Friday, when he foreshadowed plans to acquire a chipmaker. I find it surprising that anyone is surprised.

I'll get to why in a moment. First, let's review what happened.

Loading up on chips
"You're going to see us buying chip companies," Ellison told an audience at the OracleWorld conference in San Francisco. He also downplayed speculation that Oracle would seek to compete with Accenture (NYSE: ACN  ) , Infosys, and IBM (NYSE: IBM  ) in professional services, media reports say.

Ellison would rather control the design and development of all the products Oracle sells and in the process become more like Apple. The key difference: Oracle sells to chief information officers, whereas Apple sells to consumers.

Investors mostly sold on the news. The stock was down half a percent in Friday afternoon trading, a sharp contrast to an otherwise broad tech rally.

Why you shouldn't be surprised
Whether it's surprise or skepticism that accounts for the selloff in Oracle stock isn't known. But I find it hard to believe anyone is genuinely surprised to see Ellison making bold predictions.

Acquisitions are Oracle's forte. Since 2004, the database king has acquired more than 30 companies. Returns on capital have come down only marginally in that time, from 17.8% in 2006 to 14% over the past 12 months. In each case, Oracle appears to be creating value above and beyond the cost of the capital it employs.

And while we've yet to see Oracle back away from the SPARC architecture it acquired from Sun, the company hasn't given investors much reason to believe that it would shepherd further development.

Last June, news reports surfaced that a planned upgrade to the SPARC architecture, nicknamed "Rock," would be canceled in light of what was then Oracle's yet-to-be-approved purchase of Sun.

The rumors were easy to believe. Semiconductors are costly to produce, and Sun's partnerships with Intel and Advanced Micro Devices (NYSE: AMD  ) would give Oracle plenty of options for sourcing chips for new hardware.

Which company would Oracle buy?
Apparently, Ellison wants more than just options. He wants a chip-design team working on custom database hardware that blows away anything IBM and Teradata (NYSE: TDC  ) can come up with.

It's up to us investors to decide whether the plan makes sense and, if it does, which companies we think Oracle should seriously pursue. Judging by Friday's top-performing semiconductor stocks, I'd say the three most likely candidates are:

  • Micron Technology (NYSE: MU  ) , up more than 7.7%. Micron specializes in memory chips used for data storage and retrieval.
  • Cirrus Logic (Nasdaq: CRUS  ) , up more than 7%. Cirrus specializes in chips for networked media products, such as digital TVs and audio and video receivers.
  • AMD, up more than 6.8%. AMD is the yin to Intel's yang and at times has proved to be superior to its larger peer in developing high-performance server processors.

I asked the Fool's chip expert, Anders Bylund, which of these three names Oracle would be most likely to buy. His choice: AMD. He's long believed that a peer or systems developer would acquire the upstart chipmaker. But Oracle could also do well with AMD.

"If ever it was going to happen, this is the way it will happen," Anders said when I spoke with him on Friday. He also likes Big Blue's Power chips and NVIDIA's supercomputing designs as would-be brains for Oracle's database servers. I think he's right, but I'm willing to bet on AMD in my CAPS portfolio only. In CAPS, I've chosen the stock to outperform on the basis of a potential Oracle buyout.

Now it's your turn to weigh in. Should Oracle acquire a chipmaker? If so, which one should it be? Please vote in the poll below, and then leave a comment to explain your thinking.

Interested in reading more about Oracle? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Apple, NVIDIA, and Teradata are Motley Fool Stock Advisor selections. Accenture and Intel are Motley Fool Inside Value picks. Google and Nokia are Motley Fool Inside Value picks. Motley Fool Options has recommended subscribers buy Intel calls. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple, Intel, IBM, and Oracle. The Fool is also on Twitter as @TheMotleyFool, and its disclosure policy is still running against the wind.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2010, at 9:41 PM, TEBuddy wrote:

    AMD is not a target, if they were they would have been purchased 2 years ago. AMD has a backer with deeper pockets than Oracle. There is no way that their new big partner would allow AMD to be bought by Oracle, it would turn into a bidding war which would be good for AMD, but Oracle would not get them. I don't think AMD has any intention of selling out though, the way they are so misunderstood it could be disasterous for their product development. Although new money and an actual marketing budget could help AMD.

    AMD does have something they do very well; software tools for utilizing their hardware. They know software just as good as anyone.

    I would look at Synopsis as a target for any acquisition, it is THE next ARMH, but with better intelectual property that had been acquired through Virage Logic.

  • Report this Comment On September 27, 2010, at 12:21 PM, gras4 wrote:

    Given IBM's acquisition of Netezza, the ASIC/FPGA makers could be on Oracle's radar. I'm not sure how well SPARC architecture supports hardware acceleration of Transactional databases or Data-warehouses. If Oracle gets the kind of results that Netezza got, then it will be worth all this digital brouha.

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