Oracle Corp. (Nasdaq: ORCL) executives believe technology stocks are overvalued, and as a result, the company won't be making acquisitions in the near future, unless it finds a jewel that meets its pricing conditions, according to Safra Catz, president and chief financial officer of the high-tech software and hardware manufacturer.
Catz was responding to a question on the company's latest financial results announced Thursday. Fiscal 2011 fourth quarter sales rose 13 percent to $10.8 billion, and net income climbed 36 percent to $3.2 billion. These are impressive results, but anyone who has followed Oracle over the last decade would know the company has built up an impressive and quite aggressive acquisition engine that has driven its sales and margin growth. It's not a strategy to be abandoned without careful thought.
The acquisitions that Oracle has amassed over the last ten years gives the company a unique perspective and authority on the market valuation of publicly-traded and even privately-held enterprises. By my count, Oracle has made more than 70 acquisitions in the last seven years, including massive, multibillion-dollar and highly-controversial purchases. These include the $10.3 billion acquisition of PeopleSoft in 2005 and the $7.4 billion purchase of Sun Microsystems in 2009. (Click here for a list of the company's more recent acquisitions.)
In 2010, Oracle made at least 10 major acquisitions but has been relatively quiet this year. Its pending purchase of e-commerce software provider FatWire for an undisclosed amount may be the last deal the company will make for several months if valuations "don't make sense," according to CEO Larry Ellison, speaking during a conference call to discuss the company's fiscal fourth quarter results. Ellison expanded further:
I think we're able to grow through acquisitions when they're attractively priced and they make sense and they are by and large not attractively priced now and don't make sense, so we're not doing them. If these assets are wildly overpriced, we can't make a good business case for buying them. Instead, we can focus our energies on organic growth, which means increasing the size of our sales force, introducing additional appliances and [putting in] additional engineered systems.
By the way, Oracle isn't short of investment cash. It closed the recent quarter ended May 31, 2011 with about $29 billion in cash, cash equivalents, and marketable securities, with $14.8 billion in long-term debts. With its operations spinning off cash like a gusher, Oracle is able to self-finance major acquisitions or obtain funding from the investment market. Cash isn't the problem, and numerous acquisition opportunities are available, according to CFO Katz. Valuations, on the other hand, are currently at "ridiculous" levels, Katz said.
If Oracle is dialing back on acquisitions, it makes sense to closely examine its rationale and perhaps expand on the implications of this decision for the larger high-tech community. It's difficult to definitively assert with Oracle that valuations are at absurdly high levels. Why? Because investors pay today what they believe shares are worth, and those decisions are based on many factors, including some level of "irrational exuberance" as former Fed chairman Alan Greenspan once characterized the market.
If valuations are currently at irrational levels and corporate executives like Oracle's Ellison are bucking at overpaying for acquisitions that could further fuel growth in the industry, then the entire market will not see the investments required to drive innovation.
We can disagree with Mr. Ellison and his team, but they've done enough acquisitions that their opinion must count for something. Plus, if they think valuations are too high today, you can make a good guess of the direction they are headed in next. Hint: Not to another stratospheric high.