The Tycoon Report

As Predicted -- Oracle Misses the Mark

Well folks, I wanted to take this opportunity to look back on an article I wrote a few weeks ago on Oracle Corp. At the time, I referred to Oracle as being as bloated as I felt after a HUGE Thanksgiving dinner. I’m sure some of you scoffed at the idea. Unfortunately for Oracle shareholders, it seems I was right.

Oracle announced this week that it would miss profit targets due to increased costs from its PeopleSoft acquisition. This news comes on the heels of Oracle’s announcement of its latest multi-billion dollar acquisition of Siebel systems. The company rationalized this latest purchase by touting its abilities to integrate new companies into its existing infrastructure.

I find that a bit harder to swallow now. But my point in bringing this up isn’t to brag. It’s to discuss some of the dangers in owning shares of companies that are serial acquirers.

I wrote my last article in response to Oracle’s proposed multibillion dollar acquisition of Siebel Systems -- this was after Oracle already purchased PeopleSoft as well as a number of other smaller software companies. This is characteristic of an industry that is reaching the mature phase in its business cycle -- It can no longer generate the type of stellar growth targets Wall St. has come to expect, and needs to do something to bolster its business.

This is especially true in Oracle’s case because of the mounting threats its core business is facing from companies like Microsoft and other open-source products. An intelligent acquisition here and there can definitely help a company out, especially when attempting to penetrate a new market.

However, when a company begins to look like a crack addict -- sells its TV and starts robbing local gas stations -- you know there’s a problem. Oracle spending almost $20 billion on acquisitions in a year, and paying double the market price for one company is definitely making it look less and less intelligent.

To better illustrate my point, let’s take a walk down Memory Lane. From a historical perspective, let’s see how serial acquirers in mature industries have fared over time ...

First, let’s take a look at a little company some of you may or may not have heard of, Tyco International. Yes folks, the same Tyco that lost over 80% of its value; the same Tyco that had its former CEO indicted. And yes, the same Tyco that actually coined the phrase “serial acquirer” (and was even proud of it at the time). The phrase has a negative connotation -- and it should!

Throughout the mid-to-late 90’s, Tyco went on a non-stop acquisition binge, buying up several hundred companies. All the while, they were growing their revenue and earnings at an insane rate. Now for those of you who own your own businesses, imagine buying another company and integrating it into your own.

Do you know how much paperwork would have to be done? Do you know how much reorganization and streamlining would have to take place? Now think about it from the perspective of companies the size of Tyco or Oracle. How could they possibly make this many large acquisitions in such a short period of time and expect it to go smoothly?

The truth of the matter is -- It doesn’t! Integration costs and headaches are only part of the equation when looking at companies that have been trying for a growth-through-acquisition strategy. We also have to look at valuation issues. No two investors will ever agree on an exact value for a company.

The Oracle of Omaha himself, Warren Buffett, says that it’s next to impossible to pinpoint the precise value of a given company. This problem becomes even more pronounced during corporate takeovers, simply because it typically involves two or more companies bidding for the same asset. This is where emotion comes into play and where things can get really messy.

Once, when I was bidding on a large scale systems integration project for an entertainment company, I found myself making all sorts of concessions that I normally wouldn’t make.

I wasn’t doing this because I knew they would throw me more business down the road. I did it because I was bidding against a company that had stolen a contract from me the month before. I let my emotions get the better of me, and the project wasn’t nearly as profitable as it should have been ...

The same applies to takeovers. Look at companies like Cendant and Cisco. They obviously overpaid for many of their acquisitions and have since taken huge write-downs, and the values of their stocks certainly aren’t what they once were.

Not all serial acquirers are inherently bad companies. We must also look at how they went about acquiring most of these companies as well. Was it with cash, stock, a mix of both, or -- in the worst case -- issuing debt? For instance, when Jack Welch was at the helm of GE, he built up much of the company’s businesses through acquisitions. BUT, Mr. Welch didn’t go out and issue a ton of debt for his acquisitions; for the most part the man used cold hard cash!

For Oracle, less than half of its Siebel acquisition will be paid for in cash. The valuation isn’t necessarily ideal, and it’s coming in a year when they’ve already shelled out a ton of money for unrealized profits and growth in other acquisitions.

If I were in your shoes, folks, I’d do a thorough check of my portfolio and make sure I had no serial acquirers lurking about. Before you know it, your TV might be gone, and there will be news reports of local gas stations being held up.

 Until next time, folks ...