Street Patrol
Recent articles:
• Suddenly, casino stocks are a good bet, 9/7/2005
• Storms won't ground Southwest Airlines stock, 8/31/2005
• Investors should skip TiVo, 8/25/2005
More...
| | Street Patrol
Oracle makes yet another smart deal
The software maker has spent billions snapping up smaller players, the latest being Siebel Systems. I say Larry Ellison knows what he is doing -- and his deals make Oracle a buy.
By Robert Walberg
Oracle Chief Executive Larry Ellison is the Monty Hall of the software industry. Less than one year after gobbling up PeopleSoft for a cool $10.3 billion, Ellison is making another deal, this time buying Siebel Systems in a deal valued at about $5.85 billion.
Though many on Wall Street are skeptical of Oracles aggressive acquisition strategy, I maintain the companys Darwinian approach makes it a must-own stock in the software industry.
Before we start dissecting how the acquisition will help Oracle (ORCL, news, msgs) over the long term, lets take a quick look at the terms of the deal. Siebel (SEBL, news, msgs) shareholders will receive $10.66 a share in cash for each share of Siebel stock they own, representing roughly a 17% premium over Fridays closing price. Siebel shareholders do have the option to receive Oracle shares instead of cash, though no more than 30% of Siebels common stock can be exchanged for Oracle stock. The total value of the deal is $5.85 billion, but when you back out the $2.24 billion Siebel held in cash, the net cost to Oracle is about $3.61 billion.
Doubts about the deal
Siebel's price tag is the first lightning rod for critics, as Oracle is expected to borrow up to $1.5 billion to pay for Siebel. Having already purchased PeopleSoft and Retek this year for a combined $10.9 billion, investors are again wondering if Oracle is biting off more than it can chew. Its a good question, especially considering the pace and price of the deals. But with Oracle throwing off more than $5 billion per year in free cash flow, servicing its debt -- even after the Siebel deal -- is not going to be a problem.
The merger worries are much ado about nothing. The integration of PeopleSoft moved quickly and was by most accounts a big success. Fears that Oracle would lose its focus on integrating PeopleSoft when it acquired Retek also proved unfounded, as theres been no evidence that the concurrent time frame disrupted managements execution.
More from MSN Money
In fact, Oracles success in integrating acquired companies both big and small is one reason investors should feel comfortable with this deal. The fact that Siebels CEO, Tom Siebel, is a former Oracle employee is another reason to think the companies should merger with relative ease.
More problematic is why Oracle would want to pay nearly $6 billion for a company that has struggled over the past several years. The answer to that question is simple. Siebel fills a huge gap in the application side of Oracles business.
Poised for a big move
Oracle was never a big player in the fast-growing customer relationship management (CRM) side of the application business. In acquiring Siebel Systems, and its current customer base of over 3 million users, Oracle will, in one fell swoop, become the worlds biggest CRM software maker.
The deal also fits well within Oracles long-term strategy of bolstering its business applications unit to make up for the slowing in its core database business. With the deals made this year alone, Oracle has positioned itself to successfully take on SAP (SAP, news, msgs), the former undisputed leader in business applications software.
As the software industry matures, the survivors will be those companies with scale, and Oracle has quickly and so far successfully moved to gain the necessary product scope to compete and win over the long-term.
Nevertheless, Oracle continues to trade at a discount to its peers. One reason for the discount is the perceived lack of clarity created by the slew of mergers -- something that is unlikely to go away now that Ellison has gone shopping again. But what is clear is that Oracle mapped out a strategy for long-term success a couple of years ago and then moved quickly and decisively in executing that strategy. Some of the parts may not have come cheaply, but the whole is now definitely undervalued.
Assuming Oracle grows at an average annual rate of 12% over the next few years, and that it is accorded the same price-earnings to growth rate, or PEG, as the rest of the industry (about 1.75 times), then the stock looks read to climb to $17 -- 27% higher than its current price. Smart investors, come on down.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
|
