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Mergers and acquisitons: Making sense of Oracle's spree

A well-known expert on the business applications market grades Oracle on its high-profile acquire-and-fuse strategy and predicts a significant role-reversal between Oracle and its chief nemesis, SAP.

Oracle has been on a merger and acquisition tear in recent years, picking up more than 20 companies and upping its ownership stake in several others. In the midst of this buying spree -- which included the purchase of customer relationship management (CRM) giant Siebel Systems, a bloody battle for CRM mainstay PeopleSoft, and the purchases of a host of smaller applications companies that opened Oracle up to new industry verticals -- Oracle announced Project Fusion, a bold plan to enable all the spoils of its acquisitions to run seamlessly on the Oracle Fusion Middleware platform.

It can all get pretty confusing.

To clear the air about Oracle's growing number of mergers and acquisitions, caught up with analyst Michael Fauscette, vice president of the applications program at Framingham, Mass.-based International Data Corporation. Fauscette, a business applications market expert, sized up Oracle's acquisition and fusion strategy so far and offered some predictions -- in his opinion, we will probably see Oracle taking a break from buying, while its chief rival, SAP AG, adopts a new attitude toward non-organic growth.

How would you rate the success of Oracle's acquisition strategy so far?

Michael Fauscette: I actually believe that they have been successful to maybe very successful and I think that maybe the jury is still out on the very successful part for the long term. But all the signs point to a very strong strategy that has played out very well for them. In fact I would say that it looks like SAP is even starting to change [as a result]. Their original plan was organic growth, and now it looks like they're starting to adopt a more aggressive acquisition stance as well. In some ways, that -- as well as the fact that the numbers this last earnings call were very strong -- validates Oracle. They seem to be moving in the right direction, and it seems that the integration has gone well … on the small end, and it seems to be moving along in the large acquisitions as well. I think they have a very well-managed corporate development organization.

Oracle last week reported 80% growth in new license revenues for the last quarter, and that growth is generally attributed to the acquisition strategy. Would you say these results have SAP playing defense at this point?

Fauscette: I don't know that I would call it defense. Maybe it's slightly defensive, but I think that if nothing else they're realizing that organic growth may not actually be enough in the longer term in the market and that maybe acquisition is a more viable way to do several things. The interesting thing I think that Oracle has done, for instance, is moving into the retail space with Retek. They've done an excellent job of saying, "Here is an underserved vertical or subvertical that we can grow quickly." They've done a good job of looking at fit, both cultural fit and technology fit, and from a market stance they've picked up good market share by moving into those verticals aggressively through acquisition. I think SAP sees that. I'm not sure that I would call it defensive necessarily because they are still the applications leader by far. But I think that SAP is rethinking that and starting to look more at the acquisition path as well.


What jumps out at you about Oracle's decision to integrate the spoils of its acquisitions onto its Fusion Middleware platform?

Fauscette: I think Fusion is going to play out over the next five years as a real strong piece. One of the areas that Oracle has played really strong in is this idea that they're the only vendor -- maybe with the exception of Microsoft -- that has a full software stack. Certainly they do have a more complete software stack than an SAP or some of the other players in that space because they run from the database all the way through the application layer, especially with the Fusion Middleware product. But the second theory that they went into from a strategy standpoint was to take each piece of the stack and make it modular so that they can take those out and sell them independently or as a complete package. A lot of that has been enabled [and] it gives you two messages: One is that [Oracle] can just come in and sell you a complete package that solves your problem. Or, if you already have an application or a database, you can pick pieces of [Oracle's] stack to complete your offering. [Oracle] can sell into both types of accounts more easily because [their] systems are more open and are more easily adaptable to multivendor environments.

Experts I've spoken to say that SAP has a more rigid or proprietary approach designed to get customers to buy into their whole stack. In today's world, does that approach close off options for SAP?

Fauscette: It does close off options. It gives you complete control if the customer happens to buy into it. But it's not a strategy that is particularly popular with customers these days, at least not in my opinion -- and that's absolutely an opinion. There is a great deal of pressure from governments and from corporations in general to make things more open so that they can operate in multivendor environments.

Do customers of acquired companies like PeopleSoft and Siebel still have major concerns about the integration process, or Fusion, as Oracle calls it?

Fauscette: Here's what seems to happen during an acquisition: You seem to have sort of a panic period when customers react or you have a relief period. It depends on the company being acquired. But then there is a period of time, especially in midsized to large acquisitions, where in the transition period you see the revenues slightly dip. But once you've done the integration and if you've done it successfully, you should start to see the revenue come back up. [You're starting to see that uptick] with PeopleSoft. Is Siebel to that point yet? We haven't decided. My gut feeling is that it's probably a quarter or so out from a strong uptick.

In your opinion, what is one of the more interesting verticals that Oracle has gotten into through acquisition?

Fauscette: One was a company called Sigma Dynamics. The company basically builds an engine that automates intelligent decision making, and they've used it in their call center products. Oracle partnered with Sigma Dynamics first and integrated it into one of their applications, and once that was successful, they acquired the company. That gives them the capability to use the engine in other parts of their applications to automate the decision-making process where it makes sense. I believe that automating decision-making processes like that is one of the future waves in the [enterprise resource planning] space.

I've heard that Oracle is planning to back off from making major acquisitions for a while. Do you think that is likely?

Fauscette: I think it is. If you look at it, who would they buy? They're certainly not going to buy SAP. I'm not saying that they don't have something on the board that they're kicking around. There could be. But I suspect that it would be a while before they find a large enough candidate [that they feel is worthy of acquisition]. But there are a lot of small candidates that could easily fall under a vertical move.

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