Here’s Why Oracle Paid Over $1.2 Billion for Acquiring Datalogix

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In December 2014, Oracle Corp. (NYSE: ORCL) had acquired the leading marketing analytics firm Datalogix for a then-undisclosed sum (Read: Oracle Acquires Datalogix, Strengthens Presence in Cloud Advertising Business). According to a recent report by the Wall Street Journal, Oracle shelled out more than a whopping $1.2 billion for the acquisition. It is not clear whether this amount was paid entirely in cash or if it was a structured transaction.

Datalogix provides data on offline consumer spending to digital marketers. Marketers use this data to track the effectiveness of their advertisements on consumers, based on which they optimize their mode of advertising and spending allocation. Datalogix had about 400 employees as of June 2014 [1] and was unprofitable as of 2014, despite estimated revenues of about $125 million. ((Datalogix Wants $1B, Adobe Kicks Tires, Ad Exchanger, December 3, 2014))

The purchase price of $1.2 billion implies that the company was valued at a revenue multiple of 9.6x. In comparison, Oracle had earlier acquired smaller digital marketing firms like BlueKai at a revenue multiple of 5.9x, [2] and Responsys at 6.9x (Read: What The Acquisition Of Responsys Means For Oracle).

In this report, we will evaluate the reasons behind Oracle agreeing to pay a hefty price for acquiring Datalogix.

We have a price estimate of $47 for Oracle, which is slightly higher than its current market price.

Check out our complete analysis for Oracle

Logic Behind Datalogix’s Purchase Price Lies Beyond Numbers

Before Oracle reached a deal to acquire Datalogix, rumors were ripe that the wildly popular ad-tech company was shopping for buyers. [3] The original list of contenders included Facebook, Adobe Systems, and TV ratings agency Nielsen. Facebook subsequently dropped out of the race as rumors of a $1 billion asking price surfaced,before Oracle scooped up the highly sought-after company.

While it may be difficult to justify a price tag of over $1.2 billion for a company that is yet to turn a profit, [3] it is not difficult to see why Datalogix was such an attractive target. The company boasts of over 650 customers including 82 of the top 100 US advertisers (such as Ford and Kraft) and 7 of the 8 top media publishers (such as Facebook and Twitter). It provides targeted insights to marketers on over $2 trillion in consumer spending from 1,500 data partners. [4]

This massive reach allows Datalogix to obtain unparalleled insights, making it one of the most formidable players in the cloud marketing analytics industry at par with major league players like the Salesforce (NYSE: CRM) ExactTarget Marketing Cloud. This very same data collection network and insights made Datalogix a highly attractive acquisition target for global tech giants with deep pockets. The scale of operations of Datalogix and its roster of customers put it head and shoulders above BlueKai and Responsys, thereby justifying a higher valuation.

Preemptive Protection Against Competition

However, impressive credentials alone may not be enough to justify a revenue multiple of 9.6x. The next piece in the puzzle is Oracle’s need to establish a strong foothold in the lucrative cloud marketing industry before competition gets out of hand. Oracle’s strength traditionally lies in its database software, and the fast-evolving cloud business is something that it is still adapting to. Recognizing its core strength, Oracle has fueled the growth in its cloud business predominantly by acquisitions instead of attempting to develop the products and capabilities in-house.

Oracle’s earlier acquisitions of BlueKai and Responsys made it a notable player in the cloud marketing business. However, pure play cloud majors like Salesforce’s ExactTarget, Adobe’s Media Optimizer, and a number of smaller competitors like Constant Contact (NASDAQ:CTCT), have been making their presence felt in the market. Datalogix is a powerhouse by cloud marketing analytics standards and had put itself up for sale. Had it been acquired by a major competitor like Adobe (which was rumored to be in the running as a potential buyer), [3] it would have been a tough blow for Oracle to recover from since no other independent players come close to Datalogix’s scale of operations. In other words, there would be no companies left to acquire which could help Oracle catch up in such a scenario.

Therefore, Oracle’s decision to pay a hefty price for Datalogix is driven as much by the capabilities it gains from the purchase, as by the advantage that its competitors stand to lose.

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Notes:
  1. Eric Roza Built a New Company Culture at Datalogix, Datalogix, Jun 27, 2014 []
  2. Based on estimated revenue of $64 million and estimated purchase price of $350 million – $400 million []
  3. Datalogix Wants $1B, Adobe Kicks Tires, Ad Exchanger, December 3, 2014 [] [] []
  4. Oracle Buys Datalogix, Oracle Press Release, December 22, 2014 []
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