With news, rumors, speculations floating around the potential acquisition in the cloud market, shareholders of Salesforce.com are enjoying the surge in their share price, especially after Bloomberg reported that it could be a potential cloud computing acquisition target. With Salesforce market capitalization standing at $47 billion, its acquisition, if ever happens, will be one of the biggest in the technology industry. Such a deal, as per my view, can be financed only by a few Fortune 100 players, and when I say “few Fortune 100 players”, I’m referring to Microsoft, Oracle and IBM (not necessarily in this order of precedence).
In this article, I’m presenting my thoughts on “Why Oracle Should Buy Salesforce” and discuss some of the key points while the business leaders work on this deal with the Bankers. You may also want to read my previous articles on Information Technology Industry and Key Metrics here, where I highlighted the key parameters pertaining to this industry.
(1) Oracle aspires to go big in cloud computing
This is the very first thought that comes to my mind when I think of this deal. Since Oracle acquired Sun Microsystems for $7.4 billion on January 27, 2010 to compete with and beat IBM’s high-end systems and SAP applications, its cloud offerings, particularly Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) has enhanced. Salesforce acquisition will help Oracle:
- uplift its cloud sales revenue from the current $2 billion to $5-6 billion
- help improve its market share. According to Gartner, the combination would make Oracle the largest player in the CRM market
- enhance its customer base, and
- complete its SaaS Suite
In its recent earnings report, Oracle delivered healthy growth numbers from its cloud segments with SaaS and PaaS drawing 34% and IaaS 32%. Salesforce by itself is a big player in the cloud space. Hence, this acquisition will not only supplement Oracle’s Fusion CRM and Social markets and enhance its revenues globally, but also lower its customer acquisition cost.
Oracle Database Machines (Exadata and Exalogic – which are considered to be its “Game Changers”) will also see tremendous influence in its demand as Salesforce positions itself in Oracle Product Stack. In support of my arguments, I’m highlighting few excerpts that Oracle Executives noted in the press.
- In one of the press conferences, Mark Hurd, Oracle CEO, said “The company is fundamentally a product company since it was founded by Larry in 1977… Our aspiration is to have the biggest company in the cloud.” Hurd also noted that nine out of top ten cloud companies run Oracle database and that Oracle’s cloud sales revenue has surpassed $2 billion.
- Earlier this March, Larry Ellison, Oracle Founder, Executive Chairman and CTO, made a statement saying that the company expects to make more money than Salesforce from cloud-based systems.
From Analyst perspective, Daniel Ives, an Analyst at FBR & Co, called Oracle to be “realistic buyer”. He wrote, “Oracle is desperate to establish itself as a leader in the cloud, and acquiring the leading cloud company and bringing on board a visionary leader in Marc Benioff would help toward accomplishing this goal.”
I’ll definitely go by Daniel’s statement, and extend his point by adding that it’s not just Marc, but also other Oracle veterans like Keith Block and Anthony Fernicola who would play a key role in expanding the horizon for Oracle cloud systems, should this acquisition happen. All three of them are charismatic leaders and carry significant experience in Oracle Sales and Management. Besides, I personally know many sales professionals (India and North America) who had joined Salesforce from Oracle. This sales wing will be a “ready-to-use” workforce for Larry and his CEOs once the acquisition is complete.
Oracle’s prior acquisitions of Siebel and PeopleSoft supplemented its product portfolio. Siebel and Oracle were never at competition, but Oracle swooped in the deal because SAP crushed Siebel’s CRM market. Almost similar is the case with PeopleSoft. They never wanted to be acquired – it was an eighteen months battle between ORCL and PSFT –, but the PSFT Executives couldn’t provide a good answer for the growing SaaS computing, which it was feeling a heat against.
(2) Salesforce runs on Oracle Database
If Oracle buys Salesforce, it will not only grow its database market share, but also provide up-sell opportunities, thereby further strengthening its database leadership position. Currently, Oracle enjoys a market share of nearly 48% in the Relational Database Management System market with $14.26 billion in revenues, representing about 49% of its total software revenues (FY14). Technically, much of Salesforce is written on Java on the server side, and now Oracle owns Java (after acquiring Sun Microsystems). Since Salesforce runs on Oracle DB, the acquisition will provide seamless integration, thereby drastically lowering the integration cost.
(3) Cash on Balance Sheet
Oracle has a big pile of cash lying on its Balance Sheet. At the end of Q3, 2015, its cash & cash equivalent and short-term investments stood at $44 billion. The company has also recently raised $10 billion in debt capital with several more billion available through credit lines. This fact actually fueled the rumor in the media that Oracle is the most “realistic buyer”.
While I’m not undermining the other contenders – IBM, Microsoft and SAP (I can also see HP and Google name popping up in some articles. Refer the following links) –, but Oracle has spent over $60 billion in 100 recent acquisitions to strengthen its market presence across the globe. In my opinion, this deal will add value to Oracle cloud systems from various angles. However, we might have to wait and watch till things really shape up. Stay tuned…
Also read this article to supplement your reading: http://www.forbes.com/sites/oracle/2014/01/07/larry-ellison-and-mark-hurd-emphasize-oracles-cloud-growth-2/
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