Wednesday, January 7, 2009

Oracle Corporation's M&A strategy, presented at SIIA PE forum

The Software & Information Industry Association sponsored a presentation with Vishal Bhagwati, VP Corporate Development of Oracle, to discuss Oracle's Acquisition and Integration strategy. Given the spotlight on venture exits, the topic, part of an ongoing series of events the SIIA is sponsoring for its Venture Capital members, was especially relevant.

Here are some quick Oracle facts that highlights its scale:

$22.6B Revenue for FY '08
320,000 global customers
20,000 Partners
80,000 employees

They are the second largest Saas vendor in the world where they think of it as yet another deployment option to make their products available via purchase or subscription.

Oracle Strategy:

To offer the most complete industry portfolio around standards-based architectures that are integrated to work together. They view IBM, SAP and MSFT as their key competitors and try to differentiate their position as follows:

IBM is not in applications
SAP is not in the database or in the application management field
MSFT is totally proprietary

M&A background

50+ acquisitions aggregating $45B in value. Now at the pace of completing 3-4 transactions (not including IP based deals) per quarter.

View M&A as a tool for growth, not a strategy in its own right. Post transaction, having someone accountable for the metrics is critical to bringing planned value.

Their focus is on the following value components (note to before presenting any portfolio company considering M&A with Oracle):

* Providing customers with broader and better product capabilities
* As a vehicle to meaningfully enter complementary industries
* Accelerate core product innovation
* Lower cost of customer ownership, through pre-packaged integration (drive towards permacheap).

Oracle has seen successes in their vertical industry offerings where markets such as Communications, Retail and Manufacturing have seen multiple transactions to boost organic growth. They have not yet completed any transactions in the Health care or the Public sector but, given these market sizes, it's logical they are looking deeply in these markets.

The current environment is intensifying their interest in transactions as they have currency and see an opportunity to fill in areas of interest at attractive values. Note that he stressed that Oracle deeply discounts prospective synergies in valuing their transactions.

Integration strategy

Capture hearts and minds of employees and customers
Rapid back-office integration
Track results on a weekly basis

Role of Bankers

He was asked (by me) where bankers bring the most value, introduction or deal structure. He was polite, but it seemed as if his answer was neither. They have an active industry touch program and tend to know many of the people who would be board members of acquisition targets, so approaches are easy and, if a Company is for sale, they inevitably get a call from someone (whether its a banker or board member). On structuring transactions, while they don't need assistance, a professional can readily assist the target's management team/board.

One area, where I have seen bankers greatly assist, is when the board/shareholders/management do not have aligned interests due to a 'funky' capital structure resulting from multiple funding rounds. In these instances, a professional ostensibly hired for their outside expertise can be invaluable when dealing with insiders.

Final thought

Over the years, we have seen a number of companies (best personified by Computer Associates) embark on aggressive acquisition strategies. Notwithstanding the accounting 'mischief' CA really used M&A as an effective means to emerge as a market leader. Their key flaw was abandoning innovation, therefore, when the company grew so large as to run out of meaningful acquisitions as a means to bolster growth, the deck chairs toppled into the ocean. I am not sure how much of Oracle's growth is tied to its thus far successful M&A integration, though I suspect they have the opportunity, to complement their very public transactions with some potential game changing technology based transactions (like Cisco and Citrix have so successfully done).

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