Now, Oracle May Finally Rest


By Sarah Lacy After six acquisitions worth more than $17 billion in nine months, Oracle's (ORCL) appetite for buying rivals may finally be sated. The software giant surprised few when it announced on Sept. 12 that it would purchase troubled Siebel Systems (SEBL) for $5.85 billion. The deal -- rumored widely since Siebel stumbled in the first quarter and ousted Chief Executive Mike Lawrie after less than a year on the job -- steps up Oracle's challenge to Europe's SAP (SAP) in the battle to dominate applications software.

Oracle Chief Executive Larry Ellison triggered a wave of software consolidation with an 18-month battle for PeopleSoft that closed last year. For the first time, he's now signaling that his buying spree may at last be winding down. "I don't think you'll see another major acquisition any time soon," he said on the conference call announcing the Siebel deal.

PLANTING FLAGS. The acquisition certainly fills a gap in Oracle's product lineup. Almost 80% of Ellison & Co.'s revenue still comes from its database business, despite the company's long-standing attempt to pose a serious threat to SAP in business applications, like those used to manage companies' accounting, sales staffs, and human-resources departments. Oracle software for managing companies' financial departments was strong, but other applications paled in comparison to smaller companies like PeopleSoft and Siebel, not to mention SAP.

That has all changed in the last nine months. Thanks to the PeopleSoft merger, application revenues leapt 52%, to $350 million, for the fiscal year that ended May 31. And smaller acquisitions of Retek, ProfitLogic, and iFlex plant important flags in industries like retail and banking -- two areas where neither SAP nor Oracle are strong. With Seibel, Oracle says it will rank first in software that runs customer relations.

And Oracle can make the products work together well with its own databases and application servers. In theory, that could save companies tens of millions of dollars now paid to pricey consultants to handle the integration tasks. And in a maturing market like software, it means more money that can be spent on the software itself, says Peter Coleman, analyst at ThinkEquity Partners. "The only way to increase growth is to free up some of that 90 cents on the dollar that's going to integration," he says.

NOW A NONSTARTER. SAP likely won't miss a beat playing on customers' concerns that Oracle will stumble as it tries to integrate the various new businesses it's acquiring -- or that Oracle won't support older versions of its software. "Oracle's strategy is buying customers. Ours is serving customers," says SAP spokesman Tony Roddam.

In recent years, SAP was Siebel's biggest threat, surpassing Siebel as the top seller of new customer-relationship-management licenses by some estimates. And SAP is already deep into a project that would let Siebel users stick with their software but tie it easily into an SAP universe -- and the software should be ready years before Oracle can match it.

Even though customers and analysts agree that Siebel's software has always been technologically the best on the market, customers increasingly wanted to buy from one big software vendor. SAP was only too happy to beat the "best-of-breed-is-dead" drum quarter-after-quarter to steal big deals -- and some of the most talented salespeople and executives -- from Siebel.

Yet now that Siebel is part of Oracle, that argument is a nonstarter. And unless Oracle stumbles badly, SAP will have a hard time nabbing a sizable hunk of the 4,000 corporate customers Oracle has just acquired, analysts say. For one thing, the software at issue runs the core business functions of companies around the world from human resources and accounting to managing customer relationships. It's hard, complex stuff -- and expensive to integrate once, let alone ripping it out and starting over.

WHEN AND AT WHAT PRICE? "There's no compelling reason to move from Siebel, when arguably this merger will mean it will integrate better with Oracle's" other software, says Rebecca Wettemann, vice-president for research at Nucleus Research. "And existing Oracle customers are going to get much better CRM software out of this."

That's why analysts say Oracle and Siebel needed each other badly, and why few were surprised about the deal. For months, industry watchers have been confident it would happen -- the only variables being when and at what price. Siebel's market reality had changed. It could no longer close big deals, and its costs were too high for it to remain profitable without major sales.

Also, a nasty shareholder revolt was brewing with activist hedge funds buying bigger stakes and warning about a proxy battle at next year's annual meeting if Siebel didn't sell. And, while IBM (IBM) and Microsoft (MSFT) had been mentioned as potential suitors, Oracle was really the only one making an offer, analysts say.

"MARGIN GAME." For Oracle, growth in its core database software business is slowing, and it was too late to the applications game to build competing products organically, the way SAP did. Its only option was buying big installed customer bases and winning more business when companies are ready to upgrade. "This is a margin game," says ThinkEquity's Coleman. "The more software Oracle can sell with fewer salespeople, fewer support people, and less R&D, and a larger installed base, the better."

Now the hard part begins for Oracle. It will need to allay customers' concerns -- whether real or drummed up by SAP -- that it has bought too many companies too quickly of late. Oracle also embarks on the daunting task of melding the various strands of software into attractive and workable packages for customers. This may have been Oracle's last big move, but the real battle for businesses' IT dollars is just beginning.

With Andy Reinhardt in Paris and Steve Hamm in New York

Lacy is a reporter for BusinessWeek Online in Silicon Valley


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