It was January 2000. Post-Y2K euphoria still lingered over the offices of businesses and high-tech vendors everywhere--the bubble had not yet burst on the party--and Oracle Corp., the relational database king founded in 1977, was riding high on good fortune: Its stock peaked and split, and the vendor was set to ship E-Business Suite Release 11i, which Oracle touted as the first integrated-suite of enterprise applications.
Oracle claimed that by chowing on its own E-Business Suite dog food, it had saved the Redwood Shores, Calif.-based company a cool $1 billion a year.
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But Oracle wanted more: It was tops in the database and middleware spaces, but execs, including Chairman and CEO Larry Ellison, were tired of playing also-ran to others--SAP, PeopleSoft, Siebel--in the enterprise apps (ERP, CRM and supply chain) market. They knew they couldn't dislodge SAP from the top spot any time soon, but number-two might be within reach. But how?
What would ensue during the course of the next 10 years would not only reshape Oracle, forever changing its growth and product-innovation strategies, but it would also transform, to varying degrees, the enterprise software landscape and many customers' future technology plans and purchases.
"Oracle's acquisition strategy has altered the vendor landscape in a number of markets," says Paul Hamerman, VP of enterprise applications at Forrester Research, via e-mail. In addition, he says, Oracle's "acquisition strategy has been a success for the company and its shareholders." In fact, revenues grew from $10 billion in FY2000 to $23 billion in FY2009.
What about the results for Oracle's diverse groups of willing and not-so-willing customers? Industry analysts interviewed for this article claim it's a mixed bag: "Customers have benefited from increased number and range of solutions--from continued investment, such as Apps Unlimited, and especially from the integration work that Oracle has done," says Warren Wilson, research director at Ovum. "But they're increasingly locked in to Oracle--with far fewer options and switching costs [that] are high."
"We'd Be Interested in Buying Almost Anything"
The watershed event for Oracle this decade was on June 9, 2003, when executives launched an unwelcome bid to acquire ERP stalwart and archrival PeopleSoft, which itself was in the midst of acquiring J.D. Edwards. Oracle's hostile, litigious takeover scheme, finally consummated some 18 months later in January 2005, marked the opening salvo in Oracle's new acquisition and growth strategies, a path which it had appeared unwilling to take on such a grand scale in the past.
"We'd be interested in buying almost anything," Ellison proclaimed at a meeting with financial analysts just a month after the PeopleSoft announcement, in July.
True to Ellison's word, by the close of 2009 Oracle had acquired 56 companies--30 of which filled out Oracle's applications portfolio, and 26 of which spruced up its technology lines of business. (The fifty-sixth acquisition is that of Sun Microsystems, which today is still pending.)
Oracle's Healthy Appetite
The application and database vendor made 56 acquisitions since 2005--from the hostile takeover of PeopleSoft in January to the pending* purchase of Sun Microsystems in 2009.
Forrester Research has diplomatically referred to Oracle as an "active acquirer" during the decade. Others might not be so polite, though, in viewing the big picture, the acrimonious PeopleSoft acquisition has been the exception, not the norm, as these transactions go. Deals "almost never end hostile," Ellison told Barron's in 2008. (To read more on this topic, see Oracle's M&A Strategy Gets Some Respect.)
Of course, Oracle's spending spree isn't representative of most high-tech companies' M&A strategies. Not many enjoy Oracle's generous 90 percent software-support profit margins or $8.8 billion in cash on hand--especially these days. Today, depending on your definition, Oracle is the or one of the largest software companies in the world: Nearly 350,000 customers (including "100 of the Fortune Global 100," Oracle marketing loves to point out) in more than 145 countries.
Its most recent quarterly data reveals that during a global economic recession--with steep drops in software spending by its customers--the vendor was able to increase profitability and operating margins, year over year. And, in comparison to rival SAP, the returns from Oracle's in-house and acquired customer bases have been able to cushion deep dives in software revenues.
Of course, consolidation among the supervendors is now a fact of life, and for customers, the vendor they didn't choose during last quarter's RFP process might just be the vendor they'll be forced to do business with next quarter. Which, industry analysts say, doesn't bother high-tech vendors in the slightest. "Overall, consolidation is less about what a single competitor is doing," Wilson says, "but more about vendors seeing opportunities to expand their solution footprints and customers seeing value in integrated solutions--even if they subsequently fret about lock-in."
Ellison saw massive consolidation coming, sermonized the trend and opened his checkbook to make damn sure it happened as he predicted it would. A November 2004 CFO.com article noted that "weeks before Oracle began its quest for PeopleSoft, Ellison publicly predicted a massive wave of consolidation that he said would eliminate about 1,000 high-tech companies, leaving a few giant category-killers, presumably including his own company. The scenario, he told The Wall Street Journal, 'is the end of Silicon Valley as we know it.'"
Changing the 'Not Invented Here' Stigma
Executive personalities aside, Oracle's aggressive acquisition strategies are, more or less, begrudgingly accepted. But at the time of Oracle's first major acquisition, PeopleSoft, the anti-Oracle sentiment was widespread.
How about this June 2003 CNET headline: "Oracle's Bid Is Bad for All." A CFO.com article in late 2004 cites a report by market-research company Techtel that found that Oracle's corporate reputation reached its lowest point in 12 years, most likely due to the very public battle over PeopleSoft.
Oracle's newfound strategy is emblematic of a significant shift in Silicon Valley's long-time perception of innovation: that buying the intellectual property of others--quite often and for the occasional staggering amount--can be a successful, long-term business strategy for the vendors and their shareholders. "By acquiring the most profitable revenue streams and customer bases, Oracle took out competitors and carved a footprint for continuous growth," says Ray Wang, a partner for enterprise strategy, at Altimeter Group. "This [new strategy] makes a lot of sense as Oracle has gained new talent, reduced the overall cost of general administration, and gained huge install base to pump new acquisitions and products."
Ellison, ever the pragmatist and engineer seeking out a solution to a problem, has done an admirable job putting a spin on Oracle's "about face": Remember, before PeopleSoft, it had made no major acquisitions (or those it cared to publicize). In a 2008 interview with The New York Times, Ellison said: "It's crazy to say you will only grow through [in-house] innovation. It's bizarre that there's a stigma to buying something rather than building it yourself."
In fact, executives sitting in the offices of the shimmering towers that overlook Larry's Lagoon in Redwood Shores have gone so far to attach the "innovative" label to how they have made their acquisitions during the past six years. Analysts aren't totally sold. "Innovative is not the first word that comes to mind to describe this strategy," Forrester's Hamerman says, "but it has been very well thought out and executed." The strategy, he adds, has given Oracle more market leverage by building a full technology stack and a broad portfolio of applications.
But as with all things, Ellison reserves the sovereign right to change his mind. Nearly two years ago, for instance, Ellison appeared steadfast to stick with the software market. According to a Wall Street Journal article, he said, back then, that computer hardware isn't "a business we have any ambitions in."
Oracle Forcing the Hands of Other Vendors
One could also argue that Oracle's aggressive buying strategy has nudged other enterprise vendors, including SAP and IBM, to make purchases that it might not have otherwise made if Oracle wasn't a deep-pocketed and everpresent threat to buy up every promising vendor in sight.
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The flurry of market-shaping BI acquisitions in 2007 is emblematic of Oracle's acquisitive impact. That year, Oracle picked up BI vendor Hyperion as well as middleware-maker BEA Systems (which was finalized in early 2008). Total purchase price for the two: nearly $12 billion.
Following the March Hyperion purchase, SAP bought BI stalwart Business Objects in October for nearly $7 billion. A month later, IBM acquired Cognos, another BI player, for $5 billion. Ovum's Wilson concedes that Oracle "may have forced SAP and IBM to move more quickly than they would otherwise," however, he says that Oracle didn't force them "to fundamentally alter their strategies--all three purchases continued the long wave of consolidation across the industry in the last several years." He notes that IBM and Microsoft also have bought dozens of companies over the years.
SAP, in particular, might have felt some searing heat by Oracle's move. "You could make a case that buying Business Objects was a strategy shift for SAP, but I view it as a major exception that doesn't change its core strategy of relying mainly on in-house development," Wilson says. "It was forced by circumstances because it couldn't afford to be without its own strong BI solution set, couldn't develop one in-house fast enough, and there were only a few independent players to acquire."
All Done or Just Getting Started?
Oracle would love to close out the year by finally closing out the Sun Microsystems deal and ending the rancor in the European Union and among MySQL devotees. Ellison said at one point this fall that Sun was losing $100 million a month. (Oracle media relations declined to make an executive available for this story.)
Ovum's Wilson categorizes Oracle "more as aggressive and opportunistic than innovative." With Sun in its stable, though, Oracle will become an even stronger force and bigger presence in companies' IT departments. "If its Sun acquisition goes through and succeeds," he says, "it will have a complete, integrated hardware and software stack for the first time--so it's an 'innovation' for Oracle but not in the industry, as the single-stack used to be common, though relatively uncommon in the past several years."
What's also important to note, says Altimeter Group's Wang, is what Oracle has not done with its acquisition strategy during the past decade: bungled it. "They learned their lessons on what not to do in an acquisition," he says, pointing to CA and Geac as vendors that have not realized as much success.
Ellison & Co. have been called many things during this past decade, but in the minds of Ellison and his cohorts, Oracle's acquisition strategy has been all about being "innovative"--whether you agree with him or not. "When you innovate," he has said in the past, "you've got to be prepared for everyone telling you you're nuts."
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