As Tom Taulli wrote earlier, Oracle Corp. (NASDAQ:ORCL) announced its intention to buy Hyperion Solutions Corp. (NASDAQ:HYSL) for $3.3 billion this morning. This will of course trigger speculation that the other two key players in the business intelligence space will go the same route. The players are French-based Business Objects (NASDAQ:BOBJ) and Canada-based Cognos Inc. (NASDAQ:COGN). The bottom line is that all three companies have been in play and facing buy-out rumors for the last three years. The only problem was they could not capture an enhanced valuation until they demonstrated real growth -- top and bottom line.
But what does this signal for Oracle? Oracle is the undisputed worldwide leader in database products. All competitors in the database field are dwarfed by Oracle. The operating margins for Oracle in pure database sales is north of 40%.
However, two problems have emerged for the company these past 4-5 years: 1) Its internally developed applications software has been a disaster, forcing Oracle to purchase Seibel Systems and PeopleSoft. 2) Database margins are being scrutinized by the customer base.
Oracle's corporate operating margins have held steady in the mid 30%, a real cash machine, but the composition of that margin is actually under pressure. Business applications software margins are running in the low 20% for ORCL, while the database margins have saved the day carrying mid 40%. The sustainability of those margins remain questionable.
The other issue facing Oracle has been that overall database market growth is in the single digits. Oracle has to defend its turf while capturing more share in a declining market. Not a good long-term prescription for growth of the stock. The Oracle management team has been famous for not overpaying for any acquisition and being able to integrate the acquired company fairly seamlessly.
The other glaring issue that Oracle has had to defend over the years is that it just cannot get the business applications business right. Its own research and development efforts have not yielded any blockbuster products so the only way to make it right has been to acquire the competition, as it had. The good news for ORCL is HYSL acquisition puts it right into SAP's face, but we heard this with both the PeopleSoft and Seibel acquisitions as well.
Larry Ellison is a competitive CEO. So let the games begin!
Georges Yared is the author recently released books "Stop Losing Money Today" and "Baby Boomer Investing...Where do we go from here?"
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