Earlier today Oracle announced its intent to acquire NetSuite… rumors of the acquisition are almost as old that if they were humans, they would attend middle school, but there was a recent pickup, and they have no materialized…
Let’s first take a look at the press release in our customary style, it can be found here:
Oracle (NYSE: ORCL) today announced that it has entered into a definitive agreement to acquire NetSuite (NYSE: N), the very first cloud company. The transaction is valued at $109.00 per share in cash, or approximately $9.3 billion.
MyPOV – Now we know why Oracle likes to grow cash reserves, it makes it Oracle’s second largest acquisition (after PeopleSoft in 2004, which turned out to be ‘just’ 1 billion more.
“Oracle and NetSuite cloud applications are complementary, and will coexist in the marketplace forever,” said Mark Hurd, Chief Executive Officer, Oracle. “We intend to invest heavily in both products—engineering and distribution.”
“We expect this acquisition to be immediately accretive to Oracle’s earnings on a non-GAAP basis in the first full fiscal year after closing,” said Safra Catz, Chief Executive Officer, Oracle.
“NetSuite has been working for 18 years to develop a single system for running a business in the cloud,” said Evan Goldberg, Founder, Chief Technology Officer and Chairman, NetSuite. “This combination is a winner for NetSuite’s customers, employees and partners.”
“NetSuite will benefit from Oracle’s global scale and reach to accelerate the availability of our cloud solutions in more industries and more countries,” said Zach Nelson, Chief Executive Officer, NetSuite. “We are excited to join Oracle and accelerate our pace of innovation.”
MyPOV – 2 CEOs, two quotes, 1 CEO and 1 founder, also two quotes. Hurd’s quote is important in regards of stopping all rumors that Oracle may discontinue NetSuite products and stating the opposite in regards of Oracle planning to invest into product and go to market. Catz quote is all about CFO, nota bene the first full fiscal year (after expected closing in this CY) is June 1st 2017 till May 30th 2018 – so quite a bit out. Goldberg’s quote is the usual positive one on the merger, ok and Nelson’s is all along Hurd’s line of further investment in product and broader reach for the NetSuite products courtesy of Oracle.
The evaluation and negotiation of the transaction was led by a Special Committee of Oracle’s Board of Directors consisting solely of independent directors. The Special Committee unanimously approved the transaction on behalf of Oracle and its Board of Directors.
MyPOV – Key to mention... because of the double ownership of Ellison in both Oracle and NetSuite.
 
The transaction is expected to close in 2016. The closing of the transaction is subject to receiving certain regulatory approvals and satisfying other closing conditions including NetSuite stockholders tendering a majority of NetSuite’s outstanding shares in the tender offer. In addition, the closing is subject to a condition that a majority of NetSuite’s outstanding shares not owned by executive officers or directors of NetSuite, or persons affiliated with Larry Ellison, his family members and any affiliated entities, be tendered in the tender offer.
MyPOV – Another key piece of information, making sure that this transaction is not turning into a management or Ellison ‘left pocket to right pocket’ transaction. It is certainly unusual to find in a press release, but then there are no other software vendors out there where double ownership of that scale is part of a transaction (at least that I know of).

 

Implications, Implications, ….

Let’s look at the implications that this acquisition has for the different constituents of the ERP market:
 

Implications for Oracle customers

This is likely not going to affect Oracle Cloud customers. Oracle has been a serial acquirer, the company knows how to do acquisitions, though this is the second- largest acquisition Oracle has done. And NetSuite has more overlap with many Oracle products than PeopleSoft had – e.g. NetSuite brings working CRM and Manufacturing applications to Oracle (something PeopleSoft did to a lesser extend). So Oracle will have to be very clear on where it sees the sweet spot for either product and what customers can expect to use depending on their size and use case. Oracle customers should also press Oracle to clarify and share the roadmap for any plans of 2 tier ERP (where Oracle Cloud products run at HQ and large subsidiaries, and NetSuite may run in smaller subsidiaries) – something that has worked well for customers of other ERP vendors.
 

Implications for NetSuite customers

As always with acquisitions, Constellation Research recommends to get any assurances, promises, roadmap items reconfirmed, best in written form. These are always difficult, but even more in an acquisition scenario. Overall this should be good news. NetSuite has been e.g. slow at rolling out to European data centers, something that Oracle will be able to accelerate – not just for Europe but other regions. It is likely that Oracle will put NetSuite under the ‘Applications Unlimited’ umbrella program – in the worst case – and there Oracle has a pretty good track record of keeping acquired applications maintained, the posterchild being the last century acquisition of RdB from DEC.
 

Implications for Partners

Oracle has already stated that it will keep all partnerships in place that NetSuite has put in place. A wise move but we will see if there is more partner consolidation over time. For Oracle partners that are not NetSuite partners – this maybe an alley to become a NetSuite partner. Conversely, for a NetSuite partner that is not an Oracle partner – it may be the option to become an Oracle partner. It will be interesting to see what it means for one of the best running partnerships in the industry -the NetSuite and Ultimate partnership for HCM, that like all other partnerships is in place and keeps going.
 

Implications for Competitors

We don’t see the acquisition making Oracle Cloud products more competitive – in the next quarters. At best there may be some ecommerce and manufacturing capabilities that Oracle may leverage from NetSuite. Changing store APIs is easy if done correctly. The most direct impact for Oracle customers is likely going to be that Oracle could put in place a similar two tier ERP strategy, that Oracle rival SAP has been running for a while with byDesign playing the role that NetSuite could play for large multinational Oracle customers. And certainly NetSuite is in a better shape and state than byDesign. In the NetSuite market it may create openings for all other players, assuming distraction on the NetSuite side, something the competition cannot count on, but certainly will try. Who will be – with NetSuite being part of Oracle – the largest independent SMB targeted ERP suite? We will see.
 

MyPOV

A good move by Oracle, that will gain – assuming NetSuite growth holds – almost 1 billion in cloud revenue. Financial analysts and markets will not remember where the cloud revenue bump came from in 15-18 months from now – so we will see if the acquisition will create the bump to the Oracle share price that management and board are expecting (the alternative would have been to buy back Oracle stock at the tune of a few billions). Likely that gamble will pay of due to the recurring nature of cloud revenue, and the one time ‘fizzle’ of share buyback (yes there are fewer outstanding shares, too).

The good news in the market is that this is not a hostile takeover for NetSuite customers. They knew NetSuite is running largely on Oracle technology, and the acquisition has been rumored for many years. Likely NetSuite customers will win with over time more capabilities and more investment into the NetSuite product. And Oracle customers may receive the one or the other NetSuite capability via an API in the cloud (we guess on commerce, merchant capability, order management etc.) as well as a two tier ERP strategy that has been working well for other enterprises using SAP.

For the cloud observers, Oracle just secured a large chunk of uniform cloud load for its IaaS, after large on premise loads (see SAP with Microsoft Azure here) and large internet property loads (see e.g. Microsoft and LinkedIn here) this was one of the largest cloud loads (on a compatible platform) that Oracle could acquire. More scale to Oracle’s IaaS offering.

For the software strategists, the questions is really why now. The acquisition was rumored for a long time, does Oracle need more cloud revenue, was NetSuite getting too expensive, was NetSuite embarking into a ‘not so’ Oracle centric architecture… all and more are plausible motives, which we are more likely than not will ever find fully disclosed.

Still early days, Oracle OpenWorld is likely to bring a lot of news and roadmaps for this acquisition. Stay tuned.


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Another way to look at it - the one slide summary:
 
 
Recent blog posts on Oracle:
  • News Analysis - Oracle Unveils Suite of Breakthrough Services.. or short: Oracle Cloud Machine - read here
  • Progress Report - Oracle Cloud - More ready than ever, now needs adoption - read here
  • Event Report - Oracle Openworld 2015 - Top 3 Takeaways, Top 3 Positives & Concerns - read here
  • News Analysis - Quick Take on all 22 press releases of Oracle OpenWorld Day #1 - #3 - read here
  • First Take - Oracle OpenWorld - Day 1 Keynote - Top 3 Takeaways - read here
  • Event Preview - Oracle Openworld - watch here

Future of Work / HCM / SaaS research:
  • Event Report - Oracle HCM World - Innovation around the Core - read here
  • Event Report - Oracle HCM World - Full Steam ahead, a Learning surprise and potential growth challenges - read here
  • First Take - Oracle HCM World Day #1 Keynote - off to a good start - read here
  • Progress Report - Oracle HCM gathers momentum - now it needs to build on that - read here
  • Oracle pushes modern HR - there is more than technology - read here. (Takeaways from the recent HCMWorld conference).
  • Why Applications Unlimited is good a good strategy for Oracle customers and Oracle - read here.

Also worth a look for the full picture
 
  • Event Report - Oracle PaaS Event - 6 PaaS Services become available, many more announced - read here
  • Progress Report - Oracle Cloud makes progress - but key work remains in the cellar - read here
  • News Analysis - Oracle discovers the power of the two socket server - or: A pivot that wasn't one - TCO still rules - read here
  • Market Move - Oracle buys Datalogix - moves more into DaaS - read here
  • Event Report - Oracle Openworld - Oracle's vision and remaining work become clear - they are both big - read here
  • Constellation Research Video Takeaways of Oracle Openworld 2014 - watch here
  • Is it all coming together for Oracle in 2014? Read here. 
  • From the fences - Oracle AR Meeting takeaways - read here (this was the last analyst meeting in spring 2013)
  • Takeaways from Oracle CloudWorld LA - read here (this was one of the first cloud world events overall, in January 2013)

And if you want to read more of my findings on Oracle technology - I suggest:
  • Progress Report - Good cloud progress at Oracle and a two step program - read here.
  • Oracle integrates products to create its Foundation for Cloud Applications - read here.
  • Java grows up to the enterprise - read here.
  • 1st take - Oracle in memory option for its database - very organic - read here.
  • Oracle 12c makes the database elastic - read here.
  • How the cloud can make the unlikeliest bedfellows - read here.
  • Act I - Oracle and Microsoft partner for the cloud - read here.
  • Act II - The cloud changes everything - Oracle and Salesforce.com - read here.
  • Act III - The cloud changes everything - Oracle and Netsuite with a touch of Deloitte - read here. 
 
More about NetSuite
  • Event Report - NetSuite SuiteWorld - NetSuite powers on innovates on all layers - read here
  • Event Preview - NetSuite Suiteworld 2016 - read here
  • News Analysis – NetSuite speaks BeNeLux – expands into Belgium, The Netherlands and Luxembourg - read here
  • News Analyis - NetSuite announces Cloud Alliance with Microsoft - read here
  • First Take - NetSuite SuiteWorld - Zach Nelson Day #1 Keynote - read here
  • First Take - Ultimate Software UltiConnect Day #1 Keynote - read here
  • Event Report - Netsuite powers on with targeted innovation - read here
  • Why NetSuite acquired TribeHR - read here
  • Act III the cloud changes everything - Oracle and NetSuite with a touche of Deloitte - read here
  • Act III and final day - A tale of two conferences - Sapphire and SuiteWorld - read here
  • The middle day - 2 keynotes and press releases - Sapphire and SuiteWorld - read here
  • A tale of 2 keynotes and press releases - Sapphire and SuiteWorld - read here
 

Finally find more coverage on the Constellation Research website here and checkout my magazine on Flipboard and my YouTube channel here.
2012, 2013, 2014, 2015 & 2016 (C) Holger Mueller - All Rights Reserved

 

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