Oracular Returns - from the WSJ
Oracle boss Larry Ellison has struck again. For the 30th time in three years, Mr. Ellison has bought another company -- this time Hyperion Solutions for $3.3 billion. The cost hasn't been inconsequential, either. The software company has spent about $13 billion in its spending spree. And Mr. Ellison continues to bang the drum about the need for further consolidation.
Is he correct? After all, most academic studies say acquisitions hurt the purchaser. And companies whose growth is predicated on takeovers often stumble when they've finished shopping -- as highlighted in yesterday's stinging 14% decline of serial wine and spirits acquirer Constellation Brands.
If Hyperion is any indication, Mr. Ellison may prove an exception. In the deal, Oracle is following its now-standard procedure in takeovers and will cut administrative costs while leaving research and development largely untouched. It plans to generate more sales by pushing existing clients toward Hyperion's software, which helps businesses sift through their corporate databases.
Oracle is paying $2.9 billion after stripping out the cash on Hyperion's books. Over the past 12 months, Hyperion had operating income of about $140 million. If Oracle cuts half of the group's administrative costs, it could generate a similar amount in savings. That would give Oracle a return of about 7% on the deal. That's probably in line with what it cost to finance the purchase.
Yet Oracle has proved able to use its growing scale to nab sales from competitors and capture additional revenue from acquired companies. With thousands of struggling software companies out there, and additional potential to earn returns in excess of Oracle's cost of capital, Mr. Ellison may just be getting started. Yet Oracle still trades 15% less than its rivals on a price-to-earnings basis. It deserves better.