Tuesday, February 17, 2009

Why the recession is good for Oracle

Ben Worthen in the Wall Street Journal (subscription required) has a long article today on Oracle's program to buy up other software companies while prices are cheap.
While most American corporations pinch pennies, Oracle Corp. is quietly going on a shopping spree.

The software giant completed 10 acquisitions in the past year, ranging from a maker of insurance-policy-writing tools, to a designer of "plan-o-gram" software used by stores to maximize their use of shelf space. This month it bought mValent Inc., a tiny maker of software that helps configure other software.

These deals, whose terms haven't been reported previously, put Oracle in a small club of cash-rich companies bargain-hunting amid the worst economy in a generation. It's a buyer's market: As traditional sources of investment and cash get scarcer -- including, of course, paying customers -- even some companies with high-quality products have turned into desperate sellers.
Oracle's first moves earlier this decade were to buy large software companies, such as Peoplesoft and Siebel. But now it has virtually exhausted these opportunities and is turning its attention to acquiring smaller software firms that give it strong niche functionality.

In 2008, Oracle bought mValent (configuration management), Tacit Software (collaboration), RuleBurst Holdings (social service agencies), Primavera (project management), Advanced Visual Tech (retail space planning), ClearApp (application management), Global Knowledge Software (eLearning), Skywire Solutions (document management) , AdminServer (insurance industry), and Empirix (voice application testing and monitoring).

My take: Even though the current recession has affected Oracle's bottom line--it reported a 1% drop in net income, its first decline in three years--Oracle's cash hoard is allowing it to scoop up software assets at prices far, far below what it would have to pay to develop them in-house. Of course, Oracle's "buy instead of build" strategy is also a lot faster and comes with the benefit of buying new customers as well as new products.

In this respect, Oracle's strategy in this recession turns out to be better than SAP's, which still largely develops most of its new products in-house. (It's acquisition of Business Objects is a major exception, of course.)

Earlier this decade, Larry Ellison predicted a major consolidation among business software developers, and he moved Oracle in a direction to take advantage of this trend. It turns out he was right and Oracle is benefiting as a result.

Update, Feb 20: Vinnie has a -- ahem -- somewhat more negative view of Oracle's acquisition program.
Oracle, in my opinion, has forgotten how to develop code. Its top executives are deal makers, not technology visionaries. Worse, when it comes to their acquisitions, they cannot retain or easily replace the entrepreneurial talent. Every person who departs Oracle comments about the mass confusion that comes with such a rapid accumulation of software IP - and Ben touches on that also in his article.

The rapid pace of acquisitions has also had a significant impact on Oracle support. Customers report frequent and confusing changes to Oracle’s support policies as so many products go in and out of stages of “lifetime support”. Little has been done to rationalize support across products – other than of course, raise maintenance to 22%
Karen Tillman, VP for Corporate Communications at Oracle, to her credit, attempts a response in the comments area of Vinnie's post.

Update, Feb. 23:
Dennis Howlett picks up on Vinnie's commentary and Oracle's response to Vinnie. Dennis agrees that Oracle's acquisition program may be good for Oracle but it hasn't delivered much in terms of innovation. He concludes:
Innovation can have many definitions but in the software world in which I live it means presenting something that provides me with a better, more cost effective and/or revenue enhancing way of getting things done. In a recessionary economy that’s an absolute must I hear time and again. How then can Oracle justify its place at the buyer’s table if all it can offer is a smorgasbord of acquired functionality, much of which is tuck in or required to flesh out incomplete offerings, ageing apps plus something sexy in CRM? Oh yes - and with a 22% maintenance price tag?
Update, Feb 23: Josh Greenbaum has a somewhat more positive view of Oracle's delivery of innovation. But in the comments section, Vinnie is having none of it.

Update, Feb 24. In a followup post, Vinnie clarifies that the issue is not just Oracle's delivery of innovation, but also a lack of "continuous improvement in its base products and services." I agree with Vinnie on this point. Most buyers that I deal with are not clamoring for "innovation" but would be satisfied with software that performs according to its specifications, maintenance releases that fix more bugs than they introduce, and ongoing support that is helpful and responsive. All at a price that doesn't require them to essentially pay for the software twice over a five year period.

Related posts

Oracle acquires leader in project management systems


Anonymous said...

Vinnie has a good point. When acquisitions occur, there is always overlaps. And confusion. I don't think more code = better products. for project mgmt, IT configuration, and these tools, you are messing with MS, IBM, CA, etc. Why would I ditch a nice to use MS product or a IBM product (when my CIO or IT director probably worked at IBM or has family/friends who work there.)

Anonymous said...

I am suprised that Oracle has not tried to buy Infor. With the size of their customer base and recurring revenue, it would be a good fit for their current strategy and make them the answer in the mid-market.

Frank Scavo said...

In response to previous comment, I don't think Info's portfolio of over 50 products fits Oracle's strategy to complement its offerings. Many of Infor's products are truly "legacy" technology. They would only add to Oracle's customer base, giving them cross-sell opportunities. But as far as adding to Oracle's functionality or vertical footprint, there's not much there. The PDM, transportation, and WMS products are an exception--as they really are best-of-breed. But there is quite a bit of chaff along with that wheat.

vinnie mirchandani said...

Frank, I have on my blog and at Josh's and elsewhere - the key here is I am framing the question in light of 5 years and $ 75 billion+ Oracle has been paid - not just a year or so or a few million. That amount is staggering - even when compared to portions of our stimulus package.

we can get lost in individual features or products, the overall payback is poor against that budget and time baseline

vinnie mirchandani said...

also, the conversation around my post has drifted towards innovations or not from Oracle. I have a follow up post that for that large investment customers have made with Oracle they should be entitled to continuous improvement in the base product and service