Hungry Oracle has appetite for further takeovers

Tech giant plans more purchases, but there is concern that this strategy will not win more customers, writes Karlin Lillington in San Francisco

Larry Ellison's new mantra? "Supersize me." The Oracle Corporation founder and chief executive told reporters after his keynote audience at Oracle's annual Open World trade show last week that the acquisition-hungry company - 10 companies in the past 10 months, including big ticket items PeopleSoft and Siebel - should double in value to around $30 billion (€24.9 billion) in a few years, and more acquisitions are on the cards.

"In order to grow at this pace, there'll have to be a couple of acquisitions along the way," Ellison said. "The tricky thing is to grow at this rate and to maintain a 40 per cent operating margin."

It was clear from the show, however, that many customers and partners are wonderingwhether Oracle is putting on fat or muscle, and whether all that bulk will make it a fit powerhouse or an obese has-been.

Questions about the acquisition strategy were at the top of the agenda for participants who put questions to Ellison during his keynote speech - open mike questions have become a trademark part of his keynotes.

They also peppered Oracle president Charles Phillips with queries during a hastily-organised round table session on the Siebel acquisition.

The company's strategy also came under fire this week from analysts when Oracle's sales results came in below analysts' predictions and, in some areas, as much as 25 per cent below the company's own estimates as well.

This spurred concern on Wall Street that the company's acquisitions, totalling $19 billion this year, were not translating into new customers.

The shortfalls caused share prices to tumble to lows not seen in three years, although Ellison said that database profits were in line with Oracle's strategy of steady 10 per cent growth per annum over 10 years.

In particular, sales of business management applications, while up 84 per cent overall at $127 million, were off analysts' predictions of $150 million, a rise expected following the acquisitions of PeopleSoft and Retek, which specialise in this type of software.

But Oracle insisted that it was notsuffering from acquisition indigestion. "The transaction is digestible and integratable," Gregory Maffei, Oracle's chief financial officer, said this week.

Currently worth $14.5 billion, Oracle paid $10.3 billion for PeopleSoft, while the Siebel deal, if approved by regulators, will ring up at $5.8 billion.

The company will not be looking for further large companies, said Ellison, and Oracle's one time interest in middleware company BEA had now waned. However, following the acrimonious purchase of PeopleSoft, he repeatedly said that Oracle would have no interest in other large companies, only to go on to bid for Siebel less than a year later.

Oracle will continue to make "niche" purchases to flesh out its offerings into areas like hosted services and customer relationship management (CRM), both Phillips and Ellison said. The company announced one such purchase - of G-Log, a Pennsylvania-based maker of logistics and transportation management software - in the middle of Open World.

Siebel - founded by ex-Oracle employee Tom Siebel - was purchased primarily for its strength in the CRM space, Phillips said. The acquisition will enable Oracle to go after Siebel competitor Salesforce.com, another company founded by an ex-Oracle employee, Marc Benioff.

"We want to go after Salesforce.com as much as we can," Ellison said during his press conference. "I'm an investor in Salesforce, and I want to see my investment go to zero."

He told his keynote audience that he believed many strong Oracle competitors would emerge in coming years, in addition to key rival SAP. "The application space is going to be diverse and complex five years from now, and it's not going to simply be Oracle versus SAP," he said.

Among them, he counted Salesforce.com, Microsoft, Netsuite, ADP and Infosys.

Phillips said that absorbing longtime rivals PeopleSoft and Siebel would not be difficult as there weren't major differences in the corporate cultures or the knowledge sets of the three companies.

"A substantial number of those people used to work for Oracle," Phillips said.

Merging the three companies constituted "a reunion and isn't as difficult as it may look from the outside".

Tom Siebel, who regularly exchanged snide potshots with Ellison in past years, would have "an ongoing role for some time to come" at Oracle, said Phillips. Major job cuts were not expected, either.

The PeopleSoft and Siebel brand names had value in the market and would continue to be used, he said, part of an Oracle attempt to calm customer fears that they will be pushed into using Oracle products over time.

Oracle will also expand its offerings to the small- to medium-sized enterprises (SMEs), a huge, if narrow profit market that it has only begun to tap into recently with trimmed down versions of its database products. The SME market "has been abandoned by a lot of our competitors. We see it as a big opportunity," said Phillips.

Asked why database manufacturer Oracle has been busy acquiring applications companies, Ellison told journalists: "The applications business is enormously profitable; the growth rates are higher than the database business. We make most of our money in licence renewals. It's the largest and most profitable part of our business. Two-thirds of it is in middleware and databases, and one-third is in applications. It's a story that we haven't done a very good job telling."

Ellison's keynote stressed the need for increased database security, as companies perform more transactions and information exchanges over the web, and switch to using voice over internet protocol (VoIP) phone networks, where voice and data calls are digitised over the same system.

Data backups should also be encrypted, he said.

As usual, the trade show featured keynotes by other big name chief executives, including Sun's Scott McNealy, who fired off one-liners at his friend Ellison's expense, HP chief executive Mark Hurd, who in a fairly bland keynote, announced new partnerships with Oracle, and Intel boss Paul Ottelini, who said that new chip designs and manufacturing processes would transform the data handling abilities of computers, while lowering energy consumption.