Oracle's NetSuite Buy Brings It Instant Cloud Credibility

Oracle's proposed acquisition of NetSuite provides the database giant with a rich suite of cloud apps, but is it enough to compete with the big boys?

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Oracle today announced that it has entered into a definitive agreement to acquire cloud software provider NetSuite in a $9.3 billion deal to make Oracle a power in the cloud space.

The move is aimed at strengthening Oracle's cloud software offerings, which have been a source of growth for the company. In its latest earnings report—for the company's fourth quarter for fiscal 2016—Oracle said its cloud revenue grew 68 percent to $859 million.

NetSuite markets an integrated cloud business software suite that includes business accounting, enterprise resource planning (ERP), customer relationship management (CRM) and e-commerce software. The company has more than 30,000 customers in over 1,000 countries.

Charles King, principal analyst at Pund-IT, said a couple of things stand out about the Oracle-NetSuite deal. "The first is how long it took," he said.

Indeed, in a tweet, James Governor, principal analyst and co-founder of RedMonk, said: "So Oracle bought NetSuite. Longest courtship ever. They started seeing each other in like 1975."

King said people have been talking about an acquisition for years, mainly due to the close ties between the two companies as Oracle founder and CTO Larry Ellison was a primary investor in NetSuite and still owns a big chunk of the company.

"In other words, the deal is a good fit technologically and culturally, so what makes it more imperative today than six months ago?" King said. "That's the second thing, which is that NetSuite will add some weight to Oracle's cloud portfolio and bolster its claims of a leadership position in that market. That makes the deal important symbolically, but I also believe business reality as typified by Salesforce is the third and largest inspiration for the deal."

Oracle likes to talk a good cloud game but is not taken seriously in every instance. "Oracle will never be a leader in cloud computing," said Trip Chowdhry, managing director of equity research at Global Equities Research, in a message to investors. "However, Oracle will be a significant participant in SaaS [software-as-a-service], and may own this niche along with"

Oracle CEO Mark Hurd said the company added about 1,600 new SaaS customers and more than 2,000 new platform-as-a-service (PaaS) customers in its fourth fiscal quarter. And on the fourth-quarter earnings call, Ellison announced an ambitious goal for the next few years: for Oracle to become the first cloud company to reach $10 billion in SaaS and PaaS revenue.

"We expect that the SaaS and PaaS hypergrowth we experienced in FY16 will continue on for the next few years," Ellison said.

Meanwhile, King noted that while NetSuite and Salesforce are growing at a steady pace, neither one is profitable. "But the latter is driving about eight times more revenues than the former and is far closer to profitability," he said. "It would take Oracle years and billions of dollars to create a business similar to NetSuite. Buying it gives Oracle some skin in the game, a position to build on and a chance to catch up with Salesforce before it disappears from sight."

Rob Enderle, founder of the Enderle Group, said Oracle doesn't have much of a reputation with regard to cloud services and capabilities.

However, "NetSuite has both the necessary skills and cloud reputation that Oracle lacks," Enderle said. "While this will help with the cloud problem Oracle has, it won't fix it alone and that will require a more concerted effort to be a market leader in this new space. NetSuite is a strong start to executing a plan that could get them where they want to go."

As to why this acquisition didn't happen years ago, given the closeness of the two companies, Enderle said: "Being pals doesn't get people thinking of you as a cloud company, and given both IBM and Microsoft are increasingly tied to cloud efforts, being odd man out was doing Oracle no good at all. Oracle wants cloud to be part of their image and thus they had to buy in with NetSuite. IBM did the same thing with SoftLayer."