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.