Oracle Shops for Growth With MICROS Systems

It's "merger Monday" (again!), yet U.S stocks are little changed this morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.05% and 0.15%, respectively, at 10:15 a.m. EDT. The health-care sector has been remarkably active this year when it comes to mergers and acquisitions, but it's the technology sector's turn to grab the headlines today: Oracle (NYSE: ORCL  ) announced this morning that it is acquiring MICROS Systems (NASDAQ: MCRS  ) for $68 per share in a transaction valued at $5.3 billion – one of the largest technology acquisitions so far in 2014.

Source: Wikimedia Commons.

This is Oracle's largest acquisition since it bought Sun Microsystems for $7.4 billion in 2010. That's a particularly meaningful statistic in the case of Oracle, which is a serial acquirer of companies.

The rationale for the deal is not hard to discern: growth. The database and software mastodon has come under pressure from Wall Street due to subpar growth. On Friday, shares of Oracle fell 4% after it announced disappointing results for its fiscal fourth quarter ended on May 31. Revenue rose just 3% year over year to $11.3 billion (for reference this is less than the rate of growth of the entire U.S. economy), nearly $200 million short of analysts' consensus estimate. Oracle also missed on profit, with adjusted EPS of $0.92 where analysts had been looking for $0.95.

With over $37 billion in net cash on its balance sheet, acquisitions are an obvious answer to Oracle's growth conundrum. Analysts were expecting MICROS to grow its EPS at 18% per annum over the next five years, nearly twice the equivalent 9.4% forecast for Oracle.

MICROS sells Internet-connected cash registers, as well as the software they run on, to retail outlets, restaurants, and casinos -- over 330,000 sites worldwide. The franchise represents an opportunity for Oracle to expand its footstep in the retail and hospitality markets.

Although the agreed price of $68 per share is less than a 4% premium to MICROS' closing price on Friday, it represents an 18% premium to the "undisturbed" closing price on June 16 (the next day, Bloomberg reported that the two companies were nearing a deal).

Furthermore, Oracle doesn't appear to be getting MICROS Systems on the cheap: As of Friday's close, MICROS' shares were valued at 23 times estimated EPS for the fiscal year ending June 20, 2015 (at more than 16, the enterprise value-to-EBITDA multiple also suggests the stock is at least fully valued). The deal looks a bit expensive, but, given that Oracle expects it to be immediately accretive to adjusted earnings per share, it's the sort of transaction that Wall Street ought to appreciate.

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