Honey I Bought The Wrong Company!
On Monday December 13th Oracle announced that it had finally reached an agreement to acquire Peoplesoft thus ending a corporate siege reminiscent of the Roman siege of the Masada. While I suspect many at Oracle are feeling quite triumphant right now, they have a big problem: they brought the wrong company.
The Other Deal
Just two days after the Peoplesoft deal was announced, Symantec announced that it was going to buy Veritas for $13.5BN. Veritas is the market leader in backup, recovery, and high availability software and also an emerging player in the database and application management markets thanks to its acquisition of Precise in 2002. As it happens, Veritas built much of its business by selling back-up and recovery software to Oracle’s customers (much in the same way that Business Objects built its BI business).
As I have written before, Oracle’s pursuit of Peoplesoft appears to have been based on two main assumptions: 1) Oracle can generate significant scale economies and marginally increase its overall growth rate by acquiring one of its major ERP competitors. 2) Oracle’s belief that its core market, data management, is a mature, low growth space.
It’s hard to dispute assumption #1 (although with the higher price Oracle is paying the deal is inherently less accretive), however assumption #2 is likely flat out wrong. There is a relative explosion of growth and innovation going on the data management business compared to the ERP business. Whether it's unstructured data management, application management, virtualization, or disaster recovery, new opportunities for growth abound in the data management space.
Just look at Veritas. It has made data management (in a broad sense) its core business and has grown revenues 17% between 2001 and 2003 while Peoplesoft has only grown its revenues only 9.4% during the same period. Granted, Veritas isn’t exactly a growth poster child, but it would have grown much faster if it wasn’t for some sales execution and product transition issues (thus its sellout to Symantec).
Moving the Needle … In the Wrong Direction
After I wrote my last piece on Oracle, a few people who claimed to be in the know told me “Hey, Oracle knows that data management represents an attractive long term opportunity, but Oracle needs to make acquisitions that will move the needle in the short term, and there are no comparable companies in the data management space that are big enough to make a difference”.
Unfortunately that statement doesn’t hold much water when one looks at Veritas. While Peoplesoft does indeed have more revenues with $699M vs. Veritas’ $497M in Q3 04 revenues, 77% of that revenue came from low margin services revenue vs. Veritas’ 42%. Given its huge services business, it's not surprising that Peoplesoft is much less profitable than Veritas with only $40M in operating profits vs. Veritas’ $96M in Q3 04. On a trailing 12 month basis this profit differential is even worse with Peoplesoft earning only $107M in profits vs. Veritas’ $500M.
What this means is that Oracle’s $10.3BN acquisition of Peoplesoft, excluding cash, equates to about 81X times operating income while Symantec is getting Veritas for the comparative bargain of about 22X operating income. Even if Oracle can get PSFT’s operating earnings back up to $250M/year (where they were in 2002 … and 2001) that’s still 35X operating income.
When you net it all out, from even an optimistic perspective, Oracle looks to be paying about a 50%+ premium for a business that is growing about ½ the rate of Veritas and producing far less in absolute dollar profits.
It’s hard to look at these numbers as well as the relative long term growth opportunities in ERP vs. data management and not come to the conclusion that Oracle is truly buying the wrong company. The irony of the situation is probably not lost on Oracle’s former product head, Gary Bloom, who just happens to be CEO of Veritas. I can just imagine him sitting back in his chair, shaking his head, and laughing.
Other Articles In This Blog By Topic: Blogs Collaboration Content Managment CRM Database Development Tools EAI ERP Internet Middleware Network Management Open Source Operating Systems Operations Management PLM RSS Security Software Stocks Supply Chain Venture Capital Wall Street Web Services Wireless
The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.