ON ORACLE THE CONSOLIDATOR

ABOUT TIME

Barron's this weekend has a cover story on Larry Ellison and how Oracle, the company he co-founded has executed an aggressive strategy of consolidating the maturing Enterprise Software business over the last few years.  The whole piece is worth reading, but here are some key excerpts:

"Ellison has transformed the humdrum database concern he co-founded in 1977 into the world's largest seller of business software. Thanks to an acquisition spree unprecedented in Silicon Valley, Oracle (ticker: ORCL) is now a behemoth with $22 billion in annual revenue. It is also strikingly efficient, having boosted its operating margins from 36% five years ago to 42%, topping those of perennial industry leader Microsoft (MSFT)..."

"Ellison, 63, certainly hasn't taken long in getting Oracle right. In less than four years, he has rolled up a veritable who's who of the Valley's business-software companies, including PeopleSoft, Siebel Systems and, most recently, BEA Systems. Since the start of 2005, Ellison has snapped up 42 companies for more than $30 billion.

The buying spree has left Oracle No. 1 in two of the three main categories of business software: non-mainframe databases, used in networks of computer servers, and middleware, which allows databases to talk to application programs, such as those used for accounting and payroll. Germany's SAP still holds the lead in enterprise applications, but SAP's brass has been served notice."

Barron's goes on to assert that company though still faces some reservations on Wall Street, trading less favorably than some of it's peers:

"You'd never know any of that from Oracle's stock. At a recent 21, it's changing hands at just 13.4 times the consensus earnings estimate for calendar 2009, below the multiple for the broad market. Although the P/E is about the same as those of rivals Microsoft, SAP (SAP) and IBM (IBM), Oracle's earnings growth is markedly stronger, offering investors more bang for the buck."

And offers some reasons of why this may be the case:

"So why isn't the stock higher? Some money managers simply don't care for Ellison and will tell you so. Many of them are concerned that Ellison isn't engaged enough, owing to his sailing competition -- he's recently been involved in a court case about when and where the prestigious America's Cup races should be held. Oracle fans, for their part, insist that Ellison is laser-focused on the business.

Then there are the skeptics who think the revenue and profit growth is simply the result of adding one new acquisition after another.

Some investors are suspicious that Oracle is hiding problems with the core businesses behind the accounting of the acquisitions, though evidence of this is nonexistent."

The piece also covers elements of the Oracle business model that merit consideration:

"Consider its high-margin, cash-generating maintenance business, which entails keeping products current for customers and providing "patches" to protect against potential problems.

Maintenance revenues -- reliable, annuity-like streams -- have grown some 24% a year during the past six years and show no sign of letting up. Oracle enjoys a maintenance-renewal rate of 90%, above the industry average in the mid-80% range. This year, maintenance revenue should come to about $10 billion, or just under half of Oracle's total revenue.

What's more, with operating margins of 90%, maintenance is on track to account for some 70% of Oracle's total operating income."

Overall, the piece does a good job presenting the textbook case of how a leading incumbent goes about consolidating share in a maturing industry.  That this has happened in the once high-growth, enterprise software business, and not in a traditional, industrial business, is the item of note.