Oracle Splurges on NetSuite to Fend off Amazon

Tech giant completes acquisition of NetSuite for $9.3 billion in an all-cash deal

o1It seems to be raining M&As this year, heralding the revival of the economic growth after a slow start to the year. Some of the high-profile technology acquisitions that have bagged headlines so far in 2016 are HP Inc. (NYSE: HPQ) buying Samsung’s printer business for $1.05 billion, SoftBank buyout of chipmaker ARM for $32 billion, Verizon Communications Inc. (NYSE: VZ) buying Yahoo Inc.’s (NASDAQ: YHOO) internet assets for $4.8 billion, and Microsoft Corp.’s (NASDAQ: MSFT) buyout of LinkedIn Corp. (NYSE: LNKD) for $26 billion.

Joining other high-profile takeovers, technology giant Oracle Corp. (NYSE: ORCL) announced on November 8th, 2016, that it has completed the acquisition of NetSuite Inc. (NYSE: N) for $9.3 billion in an all-cash deal announced in July 2016. NetSuite, a cloud computing company based in San Mateo, California, is known for its Cloud Enterprise Resource Planning (ERP), Customer Resource Management (CRM), and e-commerce services, and provides cloud-based support to 24,000 organizations that run their businesses on NetSuite software. NetSuite is Oracle’s biggest buy since its acquisition of Micros Systems Inc. for $5.3 billion in June 2014.

Focus on Big Data and Cloud

o2For Oracle, which is faced with stagnating growth, the focus is to drive growth in areas such as big data, cyber security, and cloud platforms. Having made a late entry to the cloud-computing market, Oracle has acquired more than a dozen companies since 2012, according to Bloomberg. In December 2013, it agreed to buy Responsys Inc. for $1.5 billion, followed by Acme Packet Inc. for about $2 billion, after buying Eloqua Inc. in 2012.

Transformation in the IT industry

The IT industry is undergoing a major transformation in which large organizations are shifting their workloads to the cloud to achieve higher efficiency, lower operational complexity, and rapid scaling capability. Hence, software developers have been facing headwinds posed by a market shift toward cloud-based offerings. Businesses now prefer to pay for computing resources on demand, or software-as-a-service (SaaS) subscriptions, from technology giants like Amazon.com Inc.’s (NASDAQ: AMZN) Amazon Web Services, Alphabet Inc. (NASDAQ: GOOG), and Microsoft Corp. (NASDAQ: MSFT), instead of buying storage hardware.

For Oracle, the shift to the cloud has not taken off as expected, and cloud revenue is yet to reach 15% of overall sales. Hence, Oracle is channeling major funds for cloud software and cloud infrastructure over the next two years.

o3While both Oracle and NetSuite have products in the same areas, there is little direct customer crossover. NetSuite caters to smaller companies with 700 or fewer employees, whereas nearly all of Oracle’s comparable clients have about 1,000 or more employees. While Oracle will benefit from NetSuite’s enterprise cloud suite, NetSuite will benefit from Oracle’s global scale and reach to sell its cloud solutions in more industries and more countries. With NetSuite under its belt, and backed by its own big data centers with more efficient servers, Oracle is looking to offer customers a holistic cloud suite of services to address the broader market. Oracle will let customers move existing applications to the cloud in areas such as human resources and customer relationship management, while providing developer tools and basic computing gear.

Oracle to fend off competition from Amazon

The bigger shift into cloud infrastructure follows Amazon’s decision to expand aggressively into the cloud database segment, which is Oracle’s stronghold. Amazon Web Services’ size and features clearly makes it a leader in cloud infrastructure services. In Q3 FY16, Amazon had about 45% share of the market for infrastructure-as-a-service (IaaS), where companies buy basic computing and storage power from the cloud, according to Synergy Research Group. Amazon’s revenue in this market is more than twice that of the next three players combined, Synergy said. To further fortify its market position, Amazon recently entered into a deal with VMware Inc. (NYSE: VMW) to easily manage cloud services.

In its recent Q1 FY17 earnings release reported on September 15th, 2016, Oracle stated that its cloud software and cloud platform businesses grew 77% Y-o-Y to $798 million. However, the company reported slower growth for its cloud infrastructure unit. For FY17, Oracle is on track to sell more than $2 billion of SaaS and platform-as-a-service (PaaS) annually recurring revenue. In Q1 FY17, Oracle added more than 750 new SaaS customers including 344 new SaaS Fusion ERP customers. However, worrying is the fact that a bulk of Oracle’s revenue comes from software licenses and hardware, an equation that the company is seeking to tilt towards cloud-based offerings over the next year.

At its OpenWorld annual event in September 2016, Oracle unveiled its second-generation cloud IaaS product that is reported to have twice the computing and memory of Amazon’s competing product, and four times its storage at 20% lesser cost. Oracle’s new product also has a core computing feature that lets developers easily build applications or work with databases, enabling it to take competition head-on with Amazon.com.

Stock Performance

o4Oracle’s stock finished the day at $39.55, up 1.07%, at the close on Wednesday, November 9th, 2016, having vacillated between an intraday high of $39.74 and a low of $38.39 during the session. The stock’s trading volume was at 19,497,008 for the day. The Company’s market cap was at $161.19 billion as of Wednesday’s close.

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