Oracle Corporation’s New Acquisition Could Have 2 Profound Effects

Oracle's acquisition of MICROS Systems might seem boring, but it could have two profound effects that investors should monitor.

Jun 18, 2014 at 1:00PM

You've likely never heard of MICROS Systems (NASDAQ:MCRS), but chances are that you see its products every day. Oracle's (NYSE:ORCL) proposed acquisition of MICROS might make it more of a household name, but it could also have two profound effects, one of which will have an impact on VeriFone Systems (NYSE:PAY).

What is MICROS Systems and why is Oracle interested?
MICROS is a worldwide leader -- across 180 countries and in all seven continents -- in point-of-sale hardware and software. The company offers a wide array of business solutions that serve nearly 600,000 hotels, casinos, restaurants, retailers, and cruise lines combined.

You most often see its products at restaurants when a hostess adds your name to an electronic waiting list, when servers send your food orders, or when checking in at a hotel. MICROS products are capturing data and processing payments everywhere.

Oracle announced on Tuesday its plan to purchase MICROS for $5 billion. At 23.5 times next year's expected profit, it may appear that Oracle is paying a hefty price, but it increases the company's exposure across several industries where Oracle lacks strength. This is likely the driving force behind Oracle's offer, an acquisition that could have two notable effects.

The first effect: Oracle's software business
Like MICROS, Oracle is large company that people don't see on a daily basis, as it does its business behind the scenes. Oracle has 400,000 customers, with most of its work being done in the enterprise space by increasing the performance of business networks through the cloud, hardware, software, and applications.

Approximately 74% of Oracle's $9.3 billion in fiscal third-quarter revenue came from software, with more than half of its total revenue created from license updates, support, and existing businesses within its software segment. Oracle has a great opportunity to boost its new software licenses with the acquisition of MICROS and utilize its massive network of restaurants, hotels, etc.

One area that may benefit is Oracle's customer relationship management division, where it attempts to provide clients with end-to-end business solutions including analytics, marketing, human resources, and revenue management via software and the cloud.

Looking ahead, Oracle is expected to grow revenue by 3.5% and 4.8%, respectively, during the next two years. However, if Oracle can better penetrate this new industry and gain new business through the MICROS acquisition, it could mean accelerated growth.

The second effect: VeriFone
As a result of this acquisition, we could also witness a domino effect of Oracle competitors making bids to acquire the competition of MICROS.

VeriFone is an interesting name, a company that's larger than MICROS with $1.75 billion in 12-month revenue that offers many of the same software and hardware products as its peer. While both have a large presence in restaurants, VeriFone has taken big bets in transportation, banking, mobile, and energy.

In fact, VeriFone's market capitalization of $4.2 billion means an acquirer could purchase it at near the same price as Oracle's bid to obtain MICROS; VeriFone is expected to grow 7.3% and 8.2% over the next two years, respectively. The one significant difference is that VeriFone's operating margins -- at negative 1.6% -- are far worse than those of MICROS, and they fell in 2013 following lost business and increased competition.

With all things considered, don't be surprised if Oracle's bid leads to consolidation within this space.

Foolish thoughts
In the past, Oracle was a dominant software company for database engineers, but it has since expanded into human resources and factory software and hardware. The MICROS acquisition now gives Oracle a larger presence in retail, hotel, and the consumer space. This noted spark will be interesting to monitor as it relates to other companies in the industry. Not only could this acquisition spark Oracle's growth but also lead to drastic changes within the point-of-sale industry.

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