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Oracle is bolstering its aggressive cloud efforts by spending $9.3 billion to acquire NetSuite, among the first companies to begin selling enterprise software via subscriptions.
The deal, which was announced July 28 and is expected to close this month, will bring a broad array of complementary cloud applications into the fold, according to Oracle co-CEO Mark Hurd. In addition, it will give the software giant greater reach in the important midmarket space, where NetSuite is a significant player and Oracle has little presence.
The acquisition also will bring together two companies that already have close ties. NetSuite was started by Zack Nelson, the current CEO who in the 1990s led marketing efforts for Oracle. In addition, Oracle founder, Chairman and CTO Larry Ellison through various entities owns more than 40 percent of NetSuite’s stock, which means the deal could be a financial boon for him personally.
Along with having to clear the usual regulatory hurdles, a condition of closing the deal calls for the majority of NetSuite’s outstanding shares not owned by executive officers or directors of NetSuite or by people affiliated with Ellison, his relatives or affiliated entities be tendered in the tender offer.
In a statement, Hurd said the “complementary” cloud applications from both companies “will co-exist in the marketplace forever. We intend to invest heavily in both products—engineering and distribution.”
Bruce Guptill, senior vice president and head of research at ISG Insights, said that given the closeness of the two companies, Oracle’s buying NetSuite didn’t come as a surprise. It was more a question of when the deal would get done. The two companies have had a close working relationship since NetSuite was founded in 1998.
“It’s kind of like finally adopting the foster kid you’ve raised from birth,” Guptill told eWEEK.
Oracle was late getting into the cloud-computing race, with Ellison initially dismissing it as a trend. However, in the past several years, the company has moved aggressively to build up its capabilities through acquisitions and in-house development, and company executives have touted the growing reach the company has in the space.
In a conference call last month to discuss Oracle’s most recent financial quarter, co-CEO Safra Catz noted that the company’s total cloud revenue for the quarter was $860 million, a 50 percent increase from the same period last year, and said that Oracle’s cloud business was growing faster than that of Salesforce and Workday.
During the same call, Ellison said that the key parts of Oracle’s cloud efforts—software-as-a-service (Saas), platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS)—were all growing rapidly, giving him confidence that he believed Oracle could be the first SaaS company to reach $10 billion in revenue.
“Our database customers want to move their application into our cloud putting their database on to our platform-as-a-service and then … a lot of custom applications on to our infrastructure-as-a-service,” Ellison said, according to a transcript on Seeking Alpha. “These two things go together. And we built … the second-generation data center, which we think is highly competitive with anything out there, [with] lower cost, better performance, better security, better reliability than any of our competitors, and there’s huge demand for it, and we’re now starting to bring customers into that. We think that’s another very important driver to Oracle for overall growth.”
Industry analysts said that the NetSuite deal will be a boost to Oracle’s cloud ambitions. It will open up the midmarket and NetSuite’s customers into the space to Oracle, but the late start into the space will continue to haunt the software maker, they said.
“Oracle has talked for the last few years that they ‘got’ and were ready for the cloud, but the reality is that they started too late and are behind their competitors,” Patrick Moorhead, principal analyst with Moor Insights and Strategy, wrote in an email to eWEEK. “Companies can build, partner or buy their way into the new stuff, and because Oracle was late to the cloud party, they needed to buy NetSuite. Organic growth just wasn’t cutting it.”
Oracle to Buy NetSuite for $9.3 Billion in Cloud Push
The midmarket play will benefit Oracle, Moorhead wrote, but added that “it’s important Oracle doesn’t muck too much with NetSuite, unlike Sun Microsystems, which they essentially pulled apart and therefore lost their edge.”
Charles King, principal analyst with Pund-IT, told eWEEK that another advantage for Oracle is that it will be able to add $740 million or so in annual revenue to its own bottom line, enabling it to boost the financial numbers around its cloud business.
However, the company continues to sit in the middle of the pack of cloud providers, behind the likes of IBM, Amazon, Google and Microsoft, King said. A key difference between Oracle and the other vendors is that the company is building its cloud business off its database and enterprise apps that are used by enterprises, while the others tend to be more software-agnostic in their efforts, he said.
That said, the NetSuite acquisition will be a good one for Oracle, King said.
“The deal immediately brings Oracle greater exposure into midmarket-size companies,” he said. “They are really the meat and potatoes of NetSuite’s customer base.”
ISG’s Guptill said Oracle and NetSuite have been working together for years helping customers that are pursuing what he called two-tier strategies. A large enterprise may embrace Oracle software for itself, but for smaller subsidiaries they won, Oracle’s products may be more than they need or be too expensive, so they opt for NetSuite’s portfolio.
“It’s the way the world is going, and it’s a big reason why we’re seeing this deal happening,” he said.
SAP has a similar strategy of offering high-end products for larger customers, and simpler, less-expensive solutions for the smaller companies the customers own. However, the difference is that both product offerings are developed in-house, and SAP’s lower-end portfolios don’t come with the same level of engineering or marketing skills as NetSuite’s. A combined Oracle and NetSuite could pose significant problems for SAP, Guptill said.
The tight relationship between the two also will lessen any disruptions to the vendors or customers that traditionally come with such acquisitions, he said.