Oracle Could Learn from Past Acquisitions

Oracle has a reputation as an acquisition-hungry IT company even before its latest deal with Sun Microsystems. Analysts suggest that its acquisitions of PeopleSoft, Siebel and other companies may help Oracle with integrating Sun into its post-merger strategy. A well-executed Oracle-Sun deal has the potential to strengthen competition against IBM, Hewlett-Packard and other IT giants.

Oracle's April 20 purchase of Sun Microsystems, in a deal worth $7.4 billion, is but the latest in the company's long line of acquisitions.

In 2009 alone, Oracle has initiated a round of buyouts that included mValent, a group that produces configuration management solutions, and Relsys International, which develops drug safety and risk management solutions. Oracle has been buoyed by displaying robust financial health despite the global recession, with third-quarter fiscal 2009 earnings up 3 percent over the same quarter last year.

Rumors have also had Oracle circling a number of smaller companies,including SMB server virtualization specialist Virtual Iron Software; in that particular case, neither company publicly commented on the possibility of a deal.

Among Oracle's 11 acquisitions in 2008 were Lodestar and Interlace Systems.

However, Sun Microsystems is a larger and more mature company that comes with its own set of buyout challenges. The heated rumors over the past few months of its possible acquisition, which included IBM's reported talks in early April 2009, to purchase Sun for anywhere from $6.5 billion to $7 billion, highlight both Sun's value to any company looking to expand its enterprise hardware and software market share - but also the complexities that come with trying to integrate such an entity into a pre-existing corporate structure.

Nonetheless, at least a few analysts think that Oracle will use its knowledge from past deals, including the PeopleSoft and Siebel acquisitions, to make the Sun acquisition run as smoothly as possible.

"Oracle has made these acquisitions work from a financial perspective," Ray Wang, an analyst with Forrester, wrote in an e-mail, "with year-over-year quarterly profit growth that has been generally well above 20 percent."

In Wang's opinion, Oracle utilized several factors in making these deals succeed.

"Oracle's first set of deals - i.e., PeopleSoft and Siebel - focused on installed base acquisitions that provided a strong foundation of support and maintenance customers," Wang wrote. "This base of recurring revenues provided Oracle with the room to continue strong R&D investment while reducing overall costs."

When Oracle integrated PeopleSoft in 2005, it wasted little time in institutionally asserting, through a number of policy changes, that the company was now an Oracle shop - however, research at the time showed that a number of former PeopleSoft clients considered defecting.

"In the late 1990s, Oracle made a major commitment to re-engineering its back-office processes using its own applications," Wang added. "As a result, Oracle has become highly efficient, with a ratio of general and administrative expenses to revenues of 3 to 4 percent."

Those lessons and processes, combined with having two former investment bankers heading their post-merger integration teams, indicates to Wang that Oracle has a solid chance of adding Sun and its components to the portfolio in a cost-effective manner.