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Oracle: Overvalued Stocks Stump Acquisitions

{complink 4092|Oracle Corp.} 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.

14 comments on “Oracle: Overvalued Stocks Stump Acquisitions

  1. DataCrunch
    June 24, 2011

    Oracle may slow down in terms of giant acquisitions, but the company still needs to remain competitive.  The company is currently weak in a number of areas, specifically mobile and social networking software and I could see acquisitions in these two areas.  Another area I can see Oracle making an acquisition or investing internally would be on what is becoming the standard in enterprise-ready cloud computing technology, Hadoop.  Hadoop is an open source project by Apache, which encompasses a framework for processing and querying incredibly large amounts of data on large clusters of computers.  We’ll see what Oracle will do, but I don’t see them sitting still on the acquisition front.

  2. mario8a
    June 24, 2011

    Hello

    we used ORACLE for a long time to handle all our inventory and the documentation, however recently we migrated to AGILE and … Life is good.

     

    cheers.

     

  3. Hardcore
    June 24, 2011

    we used ORACLE for a long time to handle all our inventory and the documentation, however recently we migrated to AGILE and … Life is good.

     

    Lol,

    That is very funny,  Agile IS Oracle.


  4. itguyphil
    June 24, 2011

    I still think though they're in a lull at the moment, they'll manage to wade through the waters of the moment and stay strong. They hold alot of patents and the IP  behind alot of good innovations yet to be seen.

  5. Taimoor Zubar
    June 25, 2011

    I think I would agree with Oracle's opinion here that technological companies are somewhat overvalued. Given Oracle's experience in acquisitions and their considerable success, the opinion becomes more credible. However, it would be interesting to know what measures and principles they use to determine the right value of a company. I think that information can be very useful in evaluating other companies as well.

  6. Anand
    June 25, 2011

    I agree with Larry Ellison view that assets are wildely overpriced. We have seen how some of the recent IPO's listed at very high premium and how everyone is concerned about another tech bubble. I am sure these prices will correct once investment dries up.

  7. hwong
    June 25, 2011

    Oracles stock price hasn't gone up for many years. Although the company is doing well and has alot of cash, it really means nothing for shareholder to own the stock. I would think twice when it comes to investing in the high tech stock such as oracle

  8. itguyphil
    June 25, 2011

    I guess it's all relative when it comes to stock price. I don't think there are any real 'steals' nowadays when it comes to tech stock picks. I have alot of friends that jumped on the tech bandwagon after the economic downturn banking on the fact that the tide would turn and make some nice returns. Most have been surprised to find that if any dividends were earned, they were significantly less than projected. So Oracle is in that bubble as well. In time, once the investor/consumer fears and paranoia subsude more and become more bullish, you will see Oracle ticker going up again.

  9. t.alex
    June 26, 2011

    Even mysql already belongs to Oracle. Who is the major competitor to Oracle today?

  10. DataCrunch
    June 26, 2011

    @t.alex – Oracle has many competitors, but it depends on the business and application, since Oracle is involved in many business activities (databases, servers, appliances, software applications, etc.).  But from an overall competitive landscape, I would say that the top three competitors are: IBM , Microsoft and SAP .

  11. Parser
    June 26, 2011

    Any company, which is purchasing others in large quantities goes out of business when they pause. Large quantity of cash reserve is actually artificial in most cases. That is probably why their stock is not high or is off interests to investors. A year where they do not purchase anything is the year where investors will see true income. In most situation like this one a years of no-acquisitions brings a company down. 

  12. Ashu001
    June 27, 2011

    Bolaji,

    I have always looked on Larry Ellison as an extremely smart and savvy founder CEO;who has his personal wealth tied up in Oracle.[Yes its true he gets all those stock options issued every year which contributes to tremendous equity dilution and heartburn for longterm retail investors];but bottom line is he ain't going anywhere for the longest amount of time.

    So when he talks,we listen.

    And what he had to say here,resonated very strongly with me-

    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

    I strongly and wholeheartedly agree with everything he has to say here.Today there are more and more signs that this is a major market top.So Larry is right to stay away(and protect his personal wealth as well too);till he finds more resonable valuations in the market place.

    After all,somebody's gotta have the cash to go and participate in the America's Cup right???

    Regards

    Ashish.

  13. Ashu001
    June 27, 2011

    Alex, That would be IBM, Microsoft and SAP. Regards Ashish.

  14. Ashu001
    June 27, 2011

    Wong,

    I have explained the rationale for that here

    Its everything to do with excessive equity dilution(through stock options) by Larry Ellison and his inner circle.

    Also,the fact that they pay No Dividends to speak of,is another reason not to own the stock for the long-term.

    can this change in the future?Can they start paying better quality and more substantial dividends??Its possible but highly unlikely given Larry Ellison's behavior so far.

    In fact,a lot of Oracle customers are getting very,very upset with Oracle over its pricing startegies[Too prohibitively expensive];is this indicative of a change in the Oracle Tide?? I am not sure but sure will be fun to watch.

    Regards

    Ashish.

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