Oracle deal provides partly cloudy forecast

June 23, 2014

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Oracle’s $5.3 billion deal for Micros Systems provides a cloudy forecast for shareholders in the database giant. Even if it’s the start of a new deal binge by Chief Executive Larry Ellison – which is possible – it’s not at a crazy valuation. But longtime partner Micros is more of an add-on than a way to supercharge Oracle’s effort in the cloud.

Ellison is paying $68 per share in cash for the maker of hotel and restaurant business IT systems, a 24 percent premium to the undisturbed share price. That’s about half the premium Priceline recently agreed to pay for restaurant reservations site OpenTable, as one example.

The deal, Oracle’s biggest since its 2010 purchase of Sun Microsystems, values Micros at about 26 times forecast earnings for fiscal year 2015. That’s no rock-bottom price, but it’s also hardly egregious considering bubbly multiples elsewhere in tech land. Cloud-based e-commerce competitor Demandware, for instance, trades on 1,400 times expected earnings.

The acquisition also makes some strategic sense. Micros has worked with Oracle developing its products for over 15 years. Bringing the company in-house will broaden Oracle’s software presence in the hospitality market and should also boost its business selling IT systems to retailers.

However, it doesn’t look as though Micros will do that much to shift Oracle into cloud computing, where younger, nimbler competitors are challenging its core enterprise software business. While Micros has a software-as-a-service offering, it still gets the vast majority of its revenue from sales of less sexy hardware and services.

The relatively restrained price tag may come as a relief to some investors, helping to explain why Oracle’s shares rose slightly on news of the deal. But Micros doesn’t really address Oracle’s cloud challenge. Software-as-a-service specialists such as NetSuite and Splunk trade on triple and even quadruple-digit price-to-earnings ratios. Aiming more directly for the cloud could force Oracle to pay sky-high prices, too.

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