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Acquisitions in Enterprise Technology

I've spent enough of my career in Mergers & Acquisitions in technology to have a sense for why companies, particularly in enterprise software, acquire (or choose not to). There are a variety of reasons that tend to have much more to do with the acquirer than the acquired company. (Note: most acquisition targets misunderstand this point)

There are typically 3 drivers of an acquisition in enterprise technology:

1) Revenue growth. Typically, a company will not acquire with this as a sole purpose. Because if the strategic fit is lacking, then the revenue will soon dissipate.

2) New Customers. An acquisition target could bring new clients to the acquirer, either in terms of the geography or buyer (think Chief Marketing Officer vs. Chief Information Officer)or industry.

3) Synergy with existing products. This means that the acquirer will have a broader opportunity to sell their existing products, due to the customers, footprint, or route to market from the acquired company. Note: this factor alone is typically most important in justifying an acquisition.

In my view, all three of these drives must exist for an acquisition to make sense. Number three is probably most important, followed by number two. The two of those together ensures that number one (revenue growth) can sustain itself. I rarely see enterprise acquisitions for the purpose of talent alone (i.e. acqui-hires).

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This brings us to Oracle's recently announced acquisition of Micros Systems (MCRS). In their 10-K filing, Micros describes themselves as:

MICROS Systems, Inc. is a leading worldwide designer, manufacturer, marketer, and servicer of enterprise applications solutions for the global food and beverage, hotel and retail industries...Our enterprise application information solutions comprise three major areas: (1) food and beverage information systems, (2) hotel information systems, and (3) retail information systems. The food and beverage information systems consist of hardware and software for point-of-sale and operational applications, ecommerce, back office applications, including inventory, labor and financial management, gift cards, and certain centrally hosted enterprise applications.

Simplified, Micros is a combination of hardware and software, servicing the hospitality industry. Let's look at this versus the acquisition criteria I cited above:

1) Revenue growth. At $1.3B in revenue, Micros will increase Oracle's top line from $38B to $39.3B (~3%), even if Micros does not grow organically. So, it hits that check box.

2) New Customers. I'm skeptical this brings Oracle any new customers. The hospitality industry as typically used alot of Oracle database, and their acquisition of ATG awhile back filled out their retail penetration.

3) Synergy with existing products. I don't see any obvious synergy here, for the reasons I alluded to in #2.

It would appear that Oracle is buying Micros, simply for the top-line revenue growth. They only had to pay 4x revenue for Micros due to its poor relative profitability (50% gross margins vs. the 90% that Oracle is accustomed to on software).

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I believe Oracle is trying to solve the revenue problem that is created by the opex vs. capex problem that I alluded to here. But, this is short sighted. To go back to where I started, I don't believe that an acquisition creates shareholder value, unless it checks the box on revenue growth, new customers, and product synergy. Then again, has Oracle every really cared?

It is interesting to note that what IBM is divesting (commodity hardware and retail store systems), Oracle is acquiring.

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