Oracle’s Cloud Strategy: If You Can’t Beat Them, Buy Them

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Global software behemoth Oracle Corp. (NYSE:ORCL) is continuing its trigger-happy acquisition strategy with the purchase of Maxymiser, a marketing cloud company, for an undisclosed sum. [1] Maxymiser is a leading Cloud software that enables advertisers to optimize  ad content placed in individual browsers so as to maximize user engagement. Being a relatively late entrant to the cloud computing market, Oracle opted to augment organic development through a lengthy series of acquisitions to fuel growth. Consequently, it has been using a large portion of its annual cash flow for acquiring private cloud computing companies over the last three years. Now, with the acquisition of Maxymiser, Oracle hopes to catch up to marketing cloud leader Adobe (NYSE: ADBE).

Our price estimate of $42 for Oracle Corp. is nearly 20% higher than its current market price.

See our complete analysis for Oracle Corp. here

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Acquisitions Not at Odds With Shareholders’ Value

Between fiscal 2013 and 2015, Oracle spent over $7 billion in acquisitions, almost all of which was in cash. [2] To put it in perspective, the amount Oracle spent on acquisitions forms over 15% of its cumulative cash flow from operations over the three fiscal years. The company has not disclosed whether these acquisitions, or any part thereof, were funded by debt. Nevertheless, Oracle’s Debt-to-EBITDA ratio has increased from 1.1x in fiscal 2013 to fiscal 1.8x in 2015.

To be fair, Oracle cannot be accused of ignoring shareholder value to fund its acquisition spree. Over the same period of three years, Oracle has returned a cumulative $35 billion in cash to shareholders in the form of share repurchases and dividends, which is a truly bountiful 80% of its cash flow from operations. Therefore, Oracle’s use of cash for its acquisitions may be said to be judicious as far as returns to shareholders are concerned.

Faster Integration of Acquired Companies Key to Gaining Ground

Whether Oracle’s acquisitions are value-accretive depends upon the purchase price and their successful integration with Oracle’s broader product portfolio. The company did not disclose the purchase price for acquiring Maxymiser. The latter is estimated to have annual revenues of $30 million, [3] so the price is likely to be insignificant. The acquisition thus seems like a technology “tuck-in” intended to firm Oracle’s broader offering.  Thus in this case, the success or failure of the acquisition will depend upon rapid integration of Maxymiser’s capabilities in Oracle’s Marketing Cloud offerings. Oracle has been accused of slow integration of its acquisitions in the past, [4] which could widen the gap against rivals like Adobe and Salesforce.com (NYSE:CRM).

Even as Oracle struggles to catch up in the cloud computing market, its competitors are already moving on to the next big thing. (Read: Salesforce Eyeing Expansion Into Industry Verticals as Q2 Revenues Beat Expectations) The Marketing Cloud market is estimated to be worth $10 billion and certainly has significant untapped potential. [5] But in the long run, we believe that Oracle needs to return to paving the way as it did in the Database software industry in the past, rather than following the herd in the cloud computing industry.

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Notes:
  1. Oracle Press Release, August 20, 2015 []
  2. Oracle Fiscal 2015 10-K []
  3. Maxymiser Revenue Estimate, Owler.com []
  4. Adobe emerges as marketing cloud leader, beating out Salesforce, Oracle, IBM and more, Venture Beat, October 20, 2014 []
  5. Digital Marketing, Adobe and $10 Billion Worth of Opportunities, Mobile Marketing Watch, August 18, 2014 []