Innovation & Technology September 10, 2009, 5:00PM EST

Oracle Has Customers Over a Barrel

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RUNNING OUT OF TARGETS

The consolidation strategy is clearly paying off for Ellison and his shareholders. While the major U.S. stock indices are down slightly over the last five years, Oracle shares have more than doubled, to 22. Ellison's stock is now worth $25 billion, more than the $16 billion in Microsoft shares Bill Gates holds after giving $28 billion in stock to his personal foundation. Laura Lederman, an analyst at William Blair, says there's a strong correlation between the acquisition strategy and stock price performance. "The acquisitions make Oracle a more strategic supplier to its customers," says Lederman, who rates the stock outperform.

Some analysts have questioned whether the acquisition strategy is sustainable. The number of good, sizable potential targets is shrinking fast, which could mean tech giants that depend on takeovers for growth will see their prospects dim. "When all the companies of size have been bought and the costs wrung out, this group will be very low-growth and boring," warns analyst Peter Goldmacher of securities firm Cowen & Co. Analysts are predicting that Oracle's first-quarter revenues, to be announced in two weeks, will be flat to down in part because it's the first quarter where the company won't get a big revenue boost from acquisitions.

AN ABOUT-FACE

For decades, Ellison had nothing but scorn for tech companies that bought growth. After co-founding Oracle with $2,000 in 1977, he often took swipes at rivals for "writing checks, not code." All that changed on June 6, 2003, when he launched a hostile takeover offer for rival PeopleSoft. During an interview that day with BusinessWeek in a suite at New York's Carlyle Hotel, Ellison called it the dawn of a new era in software. "There will be a handful of very large entrenched companies that will dominate the technology industry," he predicted.

The scene was classic Ellison. He was decked out in an exquisitely tailored gray suit and collarless black shirt. A Steinway baby grand served as a backdrop. Ellison argued the era of consolidation would be good for customers, too. With fewer suppliers, he said, customers could rely on the remaining players to manage the difficult task of stitching together different software programs, rather than handling the chore themselves. He also said larger companies would be able to invest more in next-generation products. "We're going to bend over backwards to make PeopleSoft customers happy," he said.

It was a pledge he made repeatedly as Oracle bought one software company after another. Ellison told customers it would support their products for years to come, and they didn't have to switch. At the same time, Oracle embarked on an ambitious development project, code-named Project Fusion. The idea was to rewrite all the software for its run-the-business applications, from accounting to planning, melding together the best features from products the company had acquired.

Some Oracle customers told BusinessWeek they are satisfied with the company and look forward to the Fusion applications. "We absolutely welcome them. We can take advantage of the unification of the applications," says Raymond Payne, president of the Oracle Applications Users Group, an association of Oracle customers. Ian Abramson, president of a similar organization, the Independent Oracle Users Group, acknowledged there's some frustration among customers with Oracle's high maintenance fees, but most understand the fees are necessary to pay for steady improvements to Oracle's products.

Other customers are fed up with what they call Oracle's high prices and tough tactics. Alaska Air Group (ALK) had bought databases from Oracle and other applications from PeopleSoft, Siebel Systems, and Hyperion. Oracle later bought all those companies, leaving the airline stuck with a single supplier for all of its core technology. This year, because of the recession, Alaska Air Group renegotiated lower fees with every one of its software suppliers—except Oracle. "They won't budge on pricing, and we're totally locked in," complains Kris Kutchera, vice-president for information technology at Alaska Air. "The bigger they've gotten, the stronger they've gotten, and it's harder for customers to get a deal."