What the Heck Is Oracle Doing?

A deal for Acme Packet raises serious questions.

Tim Beyers
Tim Beyers
Feb 5, 2013 at 6:30PM
Technology and Telecom

Forget what you think you know about  Oracle (NYSE:ORCL). The database king is no longer. Instead, Oracle has transformed itself into an infrastructure supplier whose assets now include Acme Packet (UNKNOWN:APKT.DL).

Yesterday, Oracle announced plans to acquire the upstart telecom equipment maker for $29.25 a share -- or $2.1 billion -- in cash. The purchase price amounts to a 22% premium over Friday's close.

For me, the buyout offers too little and comes too late.

Two years ago, I recommended the stock for our Motley Fool Rule Breakers service. It's been an underperformer since. Only recently has the stock recovered -- up 84% since August -- on hopes that session border controllers, or SBCs, would prove vital for connecting voice calls over LTE networks. MetroPCS turned to Acme Packet for precisely this sort of help in November.

Now Oracle takes over, adding the company's SBC technology to its portfolio as investors question the move. Here are three thus-far unanswered questions that may help to explain why Oracle fell nearly 3% following the announcement:

  1. What advantage does Oracle gain from this deal? The biggie, especially since Oracle co-president Mark Hurd's press release comments did nothing to help clarify what his company intends to do with Acme Packet's technology. Instead, he said the deal fits with Oracle's strategy of delivering "integrated best-in-class products that address critical customer requirements in key industries." (Mmmmmmm, buzzwords.)
  2. How will customers benefit? Oracle sells its own suite of communications products, which, if the deal is approved, will handle the selling of Acme Packet's gear. And that would be great if this same group were actually selling  products for transmitting data rather than tracking it, such as e-commerce and customer relationship management systems. Unfortunately, that's not the case, which means there's no telling how Oracle will market Acme Packet's products to its database software clients.
  3. Who is Oracle trying to disrupt? All signs point to Cisco Systems (NASDAQ:CSCO), which has spent considerable resources acquiring telecom capabilities and expertise -- including $1.2 billion for Wi-Fi network administrator Meraki. Oracle's pitch appears to be similar: sign on the dotted line, and we'll give you all the servers, software, and network equipment you need. Hurd employed a similar strategy in refashioning Hewlett-Packard.

Will Acme Packet bring value to Oracle shareholders? The deal isn't exactly a bargain at 37 times estimated earnings. But that's also over the short term. On the other hand, Acme Packet's SBC technology is central to efforts to make Internet telephony every bit as sturdy as the analog network we've used for the better part of a century.

If successful, the resulting sales of network infrastructure  would be a bonanza not only for Oracle but also every major supplier of Internet infrastructure. This is a race, Fool. One that Oracle chief executive Larry Ellison aims to win.