Here's What Oracle Hopes to Accomplish With its $5.3 Billion Acquisition

Oracle's huge takeover represents its latest attempt to buy growth that it likely can't produce organically.

Jun 25, 2014 at 1:00PM

Technology giant Oracle Corp. (NYSE:ORCL) recently released a dud of an earnings report. It fell flat across several key metrics last quarter. While Oracle has long been known as a technology stalwart, led by a high-profile Chief Executive Offer in Larry Ellison, the past year has not been kind.

After several consecutive unimpressive earnings reports, Oracle is looking more and more like a relic of technological history. It's still deriving a disturbingly large part of its business from hardware, which is anchoring down the company.

Oracle's situation isn't being helped by the fact that it's rapidly losing ground to competition in software and services. For a database company, it was somehow late to the cloud revolution, and is at risk of being passed by Salesforce.com (NYSE:CRM).

Oracle's organic growth has been almost nonexistent for several quarters now. In response, it's trying to engineer growth through acquisitions. Oracle's latest attempt to buy growth is its takeover of MICROS Systems, (NASDAQ:MCRS).

Here's what Oracle hopes to accomplish by buying MICROS, and why its questionable history of large acquisitions shouldn't give investors much confidence this time around.

If you can't beat 'em, buy 'em
After several weeks of speculation, Oracle recently confirmed it will buy MICROS for $68 per share. The deal is valued at $5.3 billion, or $4.6 billion after excluding MICROS' net cash. MICROS offers software for a range of industries, including retail, restaurants, and hotels. MICROS' services are used in everything from placing orders to making reservations.

The deal represents the biggest for Oracle since its 2009 acquisition of Sun Microsystems. This purchase set Oracle back $7.4 billion, or $5.6 billion net of cash.

MICROS is growing, so it will boost Oracle's top line. Revenue increased 10% in the most recent quarter and 7% over the past nine months. And, Oracle believes the transaction will be immediately accretive to earnings, based on likely cost synergies.

The exact level of accretion to Oracle shareholders remains to be seen, since Oracle is paying a hefty premium for MICROS. At a buyout price of $68 per share, Oracle is forking over a nearly 30% premium to where MICROS was trading just one month ago. Oracle is paying roughly 25 times forward earnings estimates for MICROS, which is concerning considering MICROS' fairly modest growth in recent periods.

Oracle looks like a lumbering giant
In some aspects, Oracle's takeover of MICROS looks more like an act of desperation than a shrewd tactical move. Oracle is still closely tethered to hardware, which is dragging down the company's growth. To that end, growth in hardware clocked in at just 2% in its recently concluded fiscal year. Because of this, Oracle's total revenue grew just 3% in fiscal 2014.

By contrast, Oracle is growing strongly in its software as a service, or SaaS, and platform as a service, or PaaS, businesses. Cloud revenue in these two areas jumped 25% last quarter, but since both segments still represent relatively small operations, they aren't able to lift the entire company.

The danger facing Oracle is that if it's not careful, it might start losing customers to nimbler rivals. Salesforce.com is growing leaps and bounds ahead of Oracle. Consider that Salesforce.com posted 33% revenue growth in 2013, then generated 37% revenue growth in the first quarter of the current year. Not only that, but the company recently upped its 2014 revenue forecast.

Management now expects at least $5.3 billion-$5.34 billion in revenue this year. The midpoint of its forecast would represent 31% revenue growth, yet another highly successful year.

It may be the case that with its acquisition, Oracle is trying to protect its customer base from being stolen by competitors' business applications.

Oracle throws money at its problem
Oracle believes the cloud-based services that MICROS offers will both complement its existing operations and prevent competitors from stealing away customers. Oracle has a habit of pursuing large acquisitions in an attempt to buy growth. What's concerning is that Oracle's growth is grinding to a halt, which casts doubt as to whether its last huge acquisition worked out as the company had hoped.

With this in mind, combined with MICROS' modest growth and the hefty premium Oracle is paying, it's far from guaranteed that this acquisition will be the catalyst that ensures Oracle's turnaround.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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