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 Salesforce.com.”
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.”
Oracle’s NetSuite Buy Brings It Instant Cloud Credibility
“Oracle and NetSuite cloud applications are complementary, and will coexist in the marketplace forever,” Oracle’s Hurd said in a statement. “We intend to invest heavily in both products—engineering and distribution.”
NetSuite was founded as NetLedger in 1998 when company founder Evan Goldberg received $125 million in initial financial backing from Ellison through Ellison’s venture capital firm Tako Ventures. As of the end of 2014, Ellison and family members own about 47.4 percent of NetSuite’s common stock.
“NetSuite has been working for 18 years to develop a single system for running a business in the cloud,” said Goldberg, who holds the titles of chairman and CTO of NetSuite, in a statement. “This combination is a winner for NetSuite’s customers, employees and partners.”
Oracle’s acquisition of NetSuite was always expected, Chowdhry said. “It should have been done in 2010- 2011; Oracle shareholders would have paid half the price for it … but that also means Oracle’s CEO would have made less money on his own investment in NetSuite.”
However, since Ellison owns more than 40 percent of the company, “a good price on NetSuite would also help Ellison make more money,” Chowdhry said.
Overall, there are four primary reasons the NetSuite deal makes sense for Oracle: market share, coverage in markets and vertical industries, cross-sell opportunities and expertise, said Michael Fauscette, chief research officer at G2 Crowd.
“While Oracle has been in the transition to cloud for several years and has certainly brought in cloud experienced sales and sales executives, there is still a good opportunity to leverage the deep expertise of the NetSuite team in cloud, SaaS and subscription solution selling,” he said.
Moreover, Fauscette said NetSuite brings Oracle strength in the midmarket and in departments of enterprise companies, whereas Oracle is enterprise-focused and mostly sells in the midmarket through its channel partners. NetSuite also has a solid presence in several verticals, including manufacturing, professional services, wholesale distribution and commerce, he said.
“NetSuite is clearly a midmarket play, so Oracle will have to be able to mesh their focus with its primary focus on larger enterprises,” Judith Hurwitz, president and CEO of the Hurwitz Group, told eWEEK.
Hurwitz also noted that it makes sense for Oracle to focus more attention on solutions-based cloud services rather than more commodity offerings such as infrastructure as a service, as SaaS applications are profitable ways to build revenue.
Lou Guercia, president of Magnitude Software, an enterprise information management software provider, said that while Oracle has made some progress on the cloud-based ERP front over the past five years, this move is the first that will make a real difference in terms of its share of the marketplace.
“NetSuite is the only SaaS provider in the space with a truly integrated front-office-to-back-office solution for the midmarket all the way up through the enterprise,” he said. “In terms of the overall market, this probably hurts Salesforce the most. They’ve been a leader in the cloud space for some time, and this acquisition helps Oracle make up a lot of the ground they’ve lost there.”
However, not everyone views this deal as favorable. Jeremy Roche, president and CEO at FinancialForce, a cloud ERP services provider, decries the advent of what he calls the FrankenCloud.
“One of the biggest issues plaguing organizations is the FrankenCloud, and today we’ve learned that Oracle’s will grow into an even bigger monster as it gains more bolt-on appendages including another cloud technology stack and another set of ERP and CRM apps,” Roche said.
He predicts that this move will create disarray for customers, prospects and employees at both Oracle and NetSuite. It also raises a number of questions, such as whether salespeople will compete with each other across product lines, among others.
“NetSuite customers are at risk of being drawn even more deeply into the nightmare of the FrankenCloud,” Roche said. “Oracle’s ERP and CRM acquisition track record and string of casualties including of PeopleSoft, JD Edwards and Siebel applications will only add to customer uncertainty.”