Why Oracle Should Buy Salesforce

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CEOWith 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

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Thank You! Gargfinanceblog.com completes 30 days today

Nitin Garg1 Comment

ThanksPublished 29 conceptual articles; 1,912 reads, 247 visitors and 398 appreciative comments from 20 countries

I’m overwhelmed by your appreciation, feedback and suggestions on my blog; I’m honored to receive such high regard globally. Through this message, I express my gratitude and hearty thank you to all my Readers!

6 Points to Keep in Mind While Pursuing Entrepreneurship

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EntrepreneurDo you dream of not just working for yourself, but also of building a billion dollar organization? If so, here are the six points to keep in mind as you walk the entrepreneurial path:

1) Believe in Yourself

If you don’t believe in yourself, who else will? Entrepreneurship is a lonely journey (till you find a Partner) – forming the idea alone, launching the company alone and taking your first step alone in the market can be very hard. So, it’s very important for you to believe in yourself, your capabilities and your instincts. Always remember, Titanic was built by professionals. Google and Apple were started by Amateurs.

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Leveraged Buyout (LBO): Economics and Return Analysis

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EconomicsIn this part, the Part 4 of my article on LBO, I’m going to run you through its economics – the metrics used to judge an LBO candidate and how it generates returns. But before reading further, you may want to take a glimpse of my previous articles on LBO through the following links so that we’re on the same page.

Part1: Leveraged Buyout – An Overview

Part2: Leveraged Buyout – What Makes a Strong LBO Candidate?

Part3: Leveraged Buyout – Key Participants

Metrics Used To Judge An LBO Candidate

There are two metrics that defines the attractiveness of an LBO candidate – (1) Internal Rate of Return (IRR), and (2) Cash Returns.

IRR is the primary metric that measures the total return on the sponsor’s equity investment (which includes additional capital infused or dividends received) during the investment period. For everybody’s benefit, an IRR is the discount rate at which NPV of all the cash flows (inflow and outflow) becomes zero.

The drivers that affect IRR are:

  • target’s financial performance
  • acquisition price
  • financing structure, especially the equity contribution made
  • exit multiple, and
  • holding period.

As mentioned in my first article – LBO: An Overview –, a sponsor seeks a minimum of 20% return on their investment over their holding period of five years. So, it’s obvious (looking at the drivers of IRR) that minimizing the equity contribution and acquisition price, while exiting at a higher valuation by boosting the financial performance of the target, fetches handsome returns.

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Five Thoughts As We Learn Finance

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thoughtsToday, I’m not going to discuss any Finance topic, but share with you some of the methods I adopted while learning the subject. Coming from a Computer Science background, Finance was a new subject for me. Having graduated from the college in 2003 and then working in the corporate sector for eight long years completely into computer technology and its related field, it was very difficult for me to absorb the contents. Moreover, trying to learn the things on my own was a big challenge (and change) that demanded tremendous amount of effort and dedication from me. Today, after gaining a good understanding of this subject, I realized that I should have done it in early part of my life, but nevertheless, somebody says, “Everything happens when it has to happen”. So, I’m sure it was for good.

I’ll keep this article short and simple, and at any moment you feel you should ask questions, or share your experiences, ideas and thoughts with me and others in this blog, please do not hesitate to leave your suggestion(s) in the “Comments” section below. Let’s get started!

(1) Always Keep a Paper and Pen/Pencil Beside You

Franklin Allen, Nippon Life Professor of Finance, The Wharton School says, “It’s important to realize that Finance is not a subject where you can just simply read things and understand them. You have to absorb the material over time and be able to apply it, which is somewhat different than understanding the concepts.”

So, in my opinion, the best way to learn this subject is through practice, practice and practice.

Before you pick up that finance text and start reading it, ensure that you have a cool mind. As you read, try to understand the fundamentals to the core. Always keep a paper and pencil/pen beside you, and take notes as you learn the concepts. After understanding the concept, practice a few problems in that area, and then try to solve “real-life” problems (using case studies) so that you can apply the concept. Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, Opportunity Cost of Capital, Annuity and Compounding are few of the concepts that will find its play in any aspect of finance. So, learn them in depth and apply them real-time. Also, do not confine yourself to one book. Read other authors’ compositions so that you understand the subject from every angle. Make a habit of reading finance related topics every day.

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Leveraged Buyout (LBO): Key Participants

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ParticipantToday, let’s discuss the key participants involved in an LBO transaction and the role they play in leading the LBO to its success. But before proceeding further, you may want to take a glance at the following parts that highlight my previous write-ups on LBO.

Part1: Leveraged Buyout: An Overview

Part2: Leveraged Buyout: What makes a Strong LBO Candidate?

I’ll start this article with the financial sponsors and investment bankers, and offer insights in detail, followed by a note on investors and target’s management. As you read through it, you will unearth each of the stakeholder’s activities and how they look at the transaction. You will also discover that the sponsor, I-Banker and target management drive the deal.

(1) Financial Sponsors are the private equity firms (PE), merchant banking divisions of investment banks, hedge funds, venture capital (VC) funds and special purpose acquisition companies (SPACs). PE firms, hedge funds, and VC funds raise majority of their investment capital from third-party investors such as pension funds, insurance companies, endowments and wealthy families / individuals (also known as HNI).

This raised capital is organized into funds that are usually established as limited partnerships, in which the General Partner (GP) – the sponsor – manages the day-to-day activities of the fund and are compensated with 1-2% of the committed fund as management fee, besides 20% “carry” on the investment profit.

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Cost Cutting: A Case Study

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CostCuttingThis is an extension of my previous article on cost cutting. I thought of publishing it to offer my insights on how I arrived at the precautions (in my previous article), especially the three of the four thoughts I presented under “Precautions”. I’ve also provided the hyperlink to each of these two articles so that readers can easily steer and read them one after the other. Read my previous article on “Cost Cutting: Steps, Strategies and Precautions” here.

Precaution #1: If the CEO is not leading the project, it’s not worth pursuing it

In the past 2 years, I have helped organizations (up to US$ 50 million) improve performance, execute growth strategy and maximize their business value. In one of my assignments in India, I had the opportunity to serve one of my clients in the IT sector which had concerns with declining sales and operating margins. The President and CEO of this $33 million organization made a strategic move to expand their business to cloud computing, focusing on SME, USA. He made a directive to his Finance Manger to lead the cost cutting initiative and give him the updates on the progress such that he can concentrate on his business expansion project. Unfortunately, the Finance Head resigned to pursue opportunities outside the company, thereby forcing the Owner, President and CEO to delegate the cost-cutting project to his oldest employee, the next Finance Head. Being new to the job, the new Finance Head showed enthusiasm, commanding his team to meet the expectations of his new boss. But he committed mistakes on various lines, leading to a situation which the entire organization suffered.

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