Oracle builds its cloud fortress with $9.3B NetSuite deal
Oracle is trying to add some rocket fuel in the high-stakes race to dominate cloud services — and it's doing so with a very familiar partner.
The software giant will pay $9.3 billion in cash to acquire NetSuite (N), a cloud computing company co-founded by Oracle executive chairman Larry Ellison, its largest shareholder.
Oracle (ORCL) will pay $109 in cash per NetSuite share in the transaction, expected to close this year, a 19% premium to NetSuite's closing share price of $91.57 Wednesday. NetSuite's board has unanimously approved the deal, the company said.
Shares of NetSuite (N) rallied 18.4% Thursday to $108.41 after rising 9% Wednesday on speculation of a deal. Oracle (ORCL) shares rose 0.6% to $41.19.
Redwood Shores, Calif.-based Oracle has been attempting to make a rapid, costly pivot to cloud services as large rivals including Microsoft and Amazon — along with cloud-first companies such as Salesforce.com — make aggressive plays for corporate clients with cloud-based business offerings.
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While cloud services revenue has been rising rapidly at Oracle, it hasn't been able to offset the decline in software license revenue, its biggest business, as companies shift more of their activities to Internet- or cloud-based applications.
In NetSuite, Oracle gets the company that became the first to offer a full suite of enterprise resource planning applications, said Ray Wang, principal analyst and founder at Constellation Research.
It's also buying a business with close ties to Oracle. Located in San Mateo, Calif., NetSuite was co-founded in 1998 by current NetSuite Chairman and Chief Technology Officer Evan Goldberg and Ellison as NetLedger, a cloud accounting company.
Ellison, who stepped down as Oracle CEO two years ago, is now Oracle's executive chairman. He and his family remain the largest shareholders of NetSuite, owning more than 45% of outstanding shares as of March 31, 2016, according to filings with the Securities and Exchange Commission.
With NetSuite’s IPO in 2007, the company was valued at $2.1 billion. Though it's not profitable, its market cap had increased to $7.4 billion this year.
Current NetSuite CEO Zach Nelson, who handled global marketing for Oracle from 1996 to 1998, has said he expects NetSuite to hit $1 billion in revenue for the first time.
"(Oracle and) Larry (Ellison) gets the cloud revenue he needs. NetSuite gets access to the full Oracle stack. Customers should not be aversely impacted," Wang said.
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If completed, Oracle's purchase of NetSuite would be its largest deal since buying corporate software company PeopleSoft in 2005 for $10.3 billion.
Even so, it may still not be enough.
S&P Global Market Intelligence analyst Scott Kessler kept a “hold” recommendation on shares of Oracle, which "needed to be more aggressive with cloud software M&A, given its recent limited top-line growth and overall revenue contribution.”
Ellison's ownership of both NetSuite and Oracle, in which he owns 27% of outstanding shares, may also raise questions about whether shareholders in both companies are getting the best price.
The two firms did not directly address these issues but noted the final deal is subject to a condition that a majority of NetSuite's outstanding shares not owned by NetSuite directors, or persons related to or affiliated with Ellison, vote for the deal. It also said a special committee of independent Oracle directors led the evaluation of the deal.
Oracle has been spending to bulk up its cloud business. In May, Oracle said it would pay $532 million for cloud-based utility software company Opower. The previous month, it acquired cloud service company Textura for $663 million and device data company Crosswise for a reported $500 million. And in February, Oracle bought Ravello Systems, which makes cloud testing software for a reported $500 million.
M&A activity in the software category has been booming recently with Microsoft's $26.2 billion bid for LinkedIn, announced in June, looming largest. Even before Oracle's bid for NetSuite, technology M&A this year had kept pace with the deals that led to a record-breaking 2015, when tech deals surpassed $313 billion, according to consulting firm PricewaterhouseCoopers.
So far in the second quarter of 2016, there have been 15 deals greater than $1 billion announced, totaling $73.4 billion.
The ongoing cloud computing wars have helped fuel the activity. Last month, Salesforce.com acquired e-commerce software provider Demandware for $2.8 billion — a shot across the bow of Oracle, which offers its own e-commerce platform.
NetSuite will grow Oracle's market share and add about $800 million in revenue, Constellation's Wang said. "Oracle, as with every cloud vendor, is seeking to grow their subscription revenues," he said. "NetSuite’s cloud approach fills holes in Oracle’s cloud strategy in key verticals. Commerce is a key battle ground going forward and NetSuite made significant progress with key brands."
The two companies' cloud applications "are complementary, and will coexist in the marketplace forever," said Oracle CEO Mark Hurd. "We intend to invest heavily in both products — engineering and distribution."
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