"I'm really serious!" cries software maker Oracle (Nasdaq: ORCL) CEO Larry Ellison, as he ups the software maker's bid for PeopleSoft (Nasdaq: PSFT) from $16.50 a share to $19.50. "I'm really, really serious!" Is he?
The financial press by and large assumes that Ellison is playing the spoiler to the proposed merger of PeopleSoft, noted for its human resources software, and J.D. Edwards (Nasdaq: JDEC), whose strength lies in customer relations management and supply chain.
PeopleSoft's response -- in full-page ads in such expensive media outlets as The New York Times -- gives much ammunition to that view. After all, any synergies from a PeopleSoft-J.D. Edwards joinder would threaten Oracle's effort to sell to businesses its own versions of those companies' software under the Oracle label. But it's also credible that Ellison believes that acquisitions provide the only possible growth option for Oracle.
Ellison certainly feels the pressure -- if not from his own alleged ego, then from Oracle shareholders. The software business is tough. As Jeff Fischer recently pointed out, Oracle's growth is slight, just 2% year over year for the last two quarter, though it has continued to turn those revenues into free cash flow at a 29% free cash flow margin for the last 12 months. But the prospects for increased growth are limited. Gartner Research projects a 9% rise in business software spending this year, hardly the stuff to make investors pant. Even 9% assumes that you're a company that's hitting the averages, which Oracle is not.
Costphobic execs are willing to invest, if at all, only in software that is sine qua non to the business (network testing, say) or that delivers a speedy return on investment, such as business intelligence (BI) software, which is one of the few software growth areas.
BI software allows managers to analyze their corporate databases and present business information in a scorecard format. Oracle offers business intelligence products, but the leader is Cognos (Nasdaq: COGN), while Business Objects (Nasdaq: BOBJ) and -- yes -- MicroStrategy (Nasdaq: MSTR) are also winners, with products that are compatible with all the big database systems, including those of Oracle and SAP (NYSE: SAP).
We agree with those who expect massive consolidation in the software world, and will go out on a limb that Ellison and Oracle will absorb -- not merely annoy -- other companies, if not PeopleSoft. And it's a good bet that at least one of the BI software companies will find itself a target of an Oracle or SAP in the next year, too.
The Motley Fool
