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Per Trefis analysis, Amazon should buy out Oracle
We believe that the core strengths for Amazon's AWS division and Oracle are complementary to each other, making a potential merger between the two tech giants a very real possibility.As detailed in the sections below, we estimate that Amazon could pay an enterprise value of $300 billion (equity value of $280 billion) to acquire Oracle - a figure that is roughly 55% ahead of the latter's market value of ~$180 billion.
Related: Is $20 Billion in Google Cloud Revenue Possible by 2020?
[Click to Expand] Why we think Amazon could acquire Oracle?
While Amazon was possibly the first vendor to have created the public cloud ecosystem in the mid-2000s, Oracle has been in the database business for nearly 40 years. The idea of Amazon Web Services (AWS) was to have infrastructure that could be rent out to customers who wanted lower bills for their storage and compute requirements.Oracle was late to the game, with its first generation of cloud offerings failing and the company investing heavily in development to bring its Gen 2 cloud to market.AWS's approach was creating a product and then have users adopt it. Oracle has had that user base for a long time and was unable to service the need that AWS was able to cater to.As a result was AWS commands over 40% of the public cloud market today while Oracle is not in the top 5, despite the latter running nearly 50% of the world's databases.But AWS's early mover advantage may now be waning on account of competition in the market from Microsoft Azure (which has become the underlying fabric of Microsoft's B2B and B2C offerings), Google Cloud (under its new chief) and IBM's cloud offerings (post the Red Hat deal).While Oracle's cloud on a standalone basis may not be enough to compete with AWS, Oracle's partnership with Microsoft also poses a credible risk.Another factor weighing against the incumbent cloud leaders is the drying up of the low hanging workloads that could have been migrated to the cloud. The remaining workloads are mostly mission critical and have high security requirements.Another factor that goes against AWS in this contest are the list of data breaches that have occurred at AWS customers such as Capital One, Malido Air etc.During Oracle's annual analyst meet, Larry Ellison was vocal about how Gen 2's architecture could have avoided such breaches.Furthermore, while Oracle has been trying to move its databases to the Oracle cloud, the company's software growth has not been able to offset declines in its other businesses. On the other hand, AWS has had a preferred partnership with VMware to bring AWS to on-premise systems (where the likes of Oracle and Microsoft have a leadership position).Considering that Oracle wants customers to move to a cloud and AWS wants on-premise customers to expand into, we think Oracle and AWS represent a good complementary pair.
[Click to Expand] What are the benefits of a potential combination?
Customers will get the security of Gen 2's architecture and AWS's customer service - allowing the combined company to provide a differentiated product versus competition.AWS is yet to create credible database alternative to Oracle. Bringing Oracle's database on AWS will make the combination the near de facto choice for start-ups and enterprises alike.We think the combined entity could create an additional value of ~$156 billion.
[Click to Expand] What are the risks and hurdles to a potential combination?
History of rivalry: AWS's Andy Jassy and Oracle's Larry Ellison have been embroiled in a war of words about each other’s products and operational strategies for years.However, during Oracle's 2019 analyst day event Ellison appeared to be more respectful of AWS
Technology stack combination considerations: Oracle's Gen 2 cloud separates the client and cloud control computers, while AWS runs a huge distributed system.The cost of integrating the two system and applying Oracle's autonomous database capabilities to AWS's offerings could pose a technology challenge due to the size of the combined customer base and their diverse requirements.
Anti-competitive concerns: With a share of well over 40% in the public cloud market and over 50% in the database market, the combined entity is likely to attract a lot of regulatory scrutiny in terms of how it will affect competition.
The size of the deal: We value Amazon's AWS division at $493 billion and Oracle at $250 billion.Considering Amazon's retail business (valued at $590 billion), Amazon is larger of the two companiesHence, a merger will essentially bring Oracle under AWS's fold.Even if we attribute 30% of the $156 billion synergies we estimate from a merger to Oracle, Amazon will have to cough up nearly $300 billion for Oracle making it the most expensive deal in any industry.
Estimating Values For Standalone Companies And The Combined Entity:
Step 1: Valuing Amazon
We have valued Amazon on a sum of the parts basis, as the sum of the company's AWS business and Retail businesses
#1 Valuing Amazon Retail:
Amazon Retail EV [j = d * g]
Amazon Retail EBITDA [d]
Amazon Retail EV/EBITDA [g]
Amazon vs. Alibaba: How Have Revenues Changed Over Recent Years?
Step 2: Valuing Oracle
Oracle EV [p = n * o]
Oracle EBITDA (calenderized) [n]
Oracle EV/EBITDA [o]
Click Here for a detailed look at our forecasts for revenues as well as EBITDA for Oracle
Oracle revenues (calenderized) [m]
Oracle EBITDA (calenderized) [n]
Step 3: Valuing The Combined Entity (for the cloud and database business)
#3. Estimating EV/EBITDA To Use For Combined Entity
Blended EV/EBITDA [w]
-The blended multiple is the EBITDA - weighed multiple for the combined entity.
-We believe the blended multiple represents the minimum multiplier applied to the combined entity's revenue to account for their different relative sizes.
- We estimate the actual EV/EBITDA would be higher at 19.6x due to cost benefits from combining Amazon's AWS division with Oracle