Oracle’s Larry Ellison Does The Most Business But Is Buying Profits Above Growth

Oracle President and CTO Larry Ellison delivers a keynote address during the Oracle OpenWorld conference in San Francisco on October 22, 2018.

Justin Sullivan | fake images

In his 44 years at the helm of Oracle, Larry Ellison has never spent this amount of money. Not even close.

Oracle’s announcement Monday that it will buy medical software provider Cerner for $ 28.3 billion is monumental for a company that was once seen as the software industry’s great consolidator.

On 15 occasions since 2005, Oracle has spent at least $ 1 billion for an acquisition. Seven of them exceeded $ 5 billion. In 2009, Oracle agreed to pay $ 7.4 billion for Sun Microsystems, opening its wallet for servers and storage networks to go beyond software and become what Ellison called an “embedded system” company.

But before this week, Ellison had landed just a double-digit billion-dollar deal. That happened in 2004, when Oracle bought PeopleSoft for $ 10.3 billion after a hostile battle that lasted 18 months.

By agreeing to buy Cerner for nearly three times the price of PeopleSoft, Oracle is launching itself into the modern era of mergers and acquisitions, one that is new to Ellison. Rivals have used their expanding market capitalization and growing stock of cash to buy growth or to enter a market that may keep them relevant as the world becomes cloud, mobile, and data-driven.

It is the first mega-deal for Oracle since the $ 9.3 billion purchase of cloud business management software provider NetSuite in 2016. Ellison, president of Oracle, was the largest shareholder in NetSuite, owning approximately 40%. of the company at that time.

“Should this deal [with Cerner] consummated, it could mark a return to the days of Oracle’s aggressive procurement activity, during which time the company very effectively deployed the legacy client-server application space, “Stifel analysts wrote, in a report late in the month. last week after the news of a probable “What’s different this time is that the sector is in the midst of strong secular growth driven by an architectural shift to the cloud.”

This year alone, Salesforce closed its purchase of Slack for $ 27.1 billion and Square announced plans to buy Australian fintech company Afterpay for $ 29 billion. Microsoft said it is buying voice recognition software provider Nuance Communications for $ 16 billion, and Zoom has agreed to buy contact center software company Five9 for $ 14.7 billion in stock. That deal was rejected by Five9 shareholders after a drop in Zoom’s share price made the combination unappealing.

Oracle’s purchase of Cerner, assuming it is approved by regulators and Cerner shareholders, will be right up there with the largest software offerings in history. The biggest came in 2019, when IBM closed its $ 34 billion purchase of Red Hat.

Cerner, which was founded in 1979, two years after Ellison created Oracle, is the second-largest provider of electronic medical records technology, behind Epic. Hospitals and medical facilities use the software so that doctors and staff can securely share image data, patient reports, and prescriptions.

Shares of Oracle fell 5% after the deal was announced on Monday. At $ 95 a share, the purchase price equates to a 20% premium over Cerner’s closing price on Thursday, ahead of news reports that the companies were in late-stage talks.

The cash deal is a challenge

Despite Monday’s slide, the transaction comes amid Wall Street’s renewed optimism toward Oracle. On Dec. 10, after a better-than-expected earnings report, Oracle shares soared 16%, the second-best day in two decades. The shares rose 42% this year, double the gains of the S&P 500 and hit a record last week.

But Oracle is paying cash for Cerner, rather than taking advantage of its stock appreciation. That’s a considerable burden for a company that reported $ 23 billion in cash and marketable securities at the end of the last quarter, and it typically generates about $ 12 billion a year in free cash flow. Oracle said nothing about how it would finance the $ 28.3 billion deal.

A person close to the matter said Oracle will not have to go into debt, considering the existing cash balance plus the additional cash that will be generated when the deal closes. The person asked not to be identified because the details are confidential.

Ellison may be going big, but he stays away from the kind of deals that Salesforce’s Marc Benioff is looking for, who started working with Ellison at Oracle. Salesforce has spent nearly $ 50 billion combined on Slack, Tableau, and MuleSoft in the past three years, prioritizing growth and new market opportunities over profit, at least in the short term.

Marc Benioff, President and CEO of Salesforce.com, speaks at the opening ceremony of the Salesforce Tower in San Francisco on May 22, 2018.

David Paul Morris | Bloomberg | fake images

Cerner, like Oracle, is a slow-growing, cash-shedding company, the opposite of most modern subscription software companies. Annual growth has not reached double figures since 2015, and sales were down 3.3% in 2020. Revenues are on track to increase by about 5% in 2021, to an estimated $ 5.8 thousand millions.

However, Cerner is expected to generate nearly $ 1 billion in net revenue this year. Oracle CEO Safra Catz said in the press release that the acquisition “will immediately increase non-GAAP earnings in the first full year after closing” and contribute substantially more to earnings in the second fiscal year and beyond. “

One aspect of Cerner’s business that is likely to be of particular interest to Ellison is the company’s move to Amazon Web Services. In 2019, Cerner announced an initiative codenamed “Project Apollo” that would run on the AWS infrastructure and allow customers to access cloud technologies.

Oracle was a late entrant in the cloud infrastructure business and lags behind AWS, Microsoft, and Google in terms of market share. Far from admitting defeat, Ellison takes every opportunity to promote Oracle’s cloud capabilities, occasionally at AWS’s expense.

There are many reasons to believe that Ellison sees the Oracle cloud as the final home for much of Cerner’s future migration.

The word “cloud” appears 11 times in the deal’s press release, including a quote from Oracle Executive Vice President Mike Sicilia, who said Oracle’s technology “enables us to rapidly modernize Cerner’s systems” in the move to the cloud.

Elsewhere in the statement, Oracle says, “Cerner systems running on Oracle Gen2 Cloud will be available 24 hours a day, 7 days a week, 365 days a year,” and the “goal is to offer zero time unplanned downtime in the medical environment ”.

CLOCK: Oracle in talks to buy Cerner

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Oracle’s Larry Ellison Does The Most Business But Is Buying Profits Above Growth