Growing a company through acquisitions can feel a bit liking eating Chinese food. Two hours after you’ve had a meal you’re hungry again.
Larry Ellison must be starting to feel that way. When he bought PeopleSoft, he promised it would put Oracle on course for earnings per share growth of at least 20 per cent a year. He’s more than met that promise (that is, if you care to overlook the little matter of amortisation - more on that below.)
The trouble with strategies like this is, they only work if you keep buying. Prices have been going up and suitable big targets are getting scarcer - which explains why this has now become a preoccupation on Wall Street, to judge by the questions Ellison faced at his company’s annual financial analyst meeting on Wednesday.
Ellison’s message to the doubters: "We have found some very attractive targets, and we think we can do it for a while longer." Compared to the horizontal software plays he has bought so far, the next spate of deals might involve more "vertical" companies that specialise in specific industry sectors. "We can buy a typical vertical company that’s running at 5 per cent [operating margins] and run it at 30 or 40 per cent," Ellison boasted.
The trouble is, the bigger Oracle gets, the hungrier it becomes. According to Charles Di Bona at Sanford C Bernstein, Oracle will have to spend $52-58bn on acquisitions over the next five years to keep its earnings per share machine ticking over at the desired rate. So either the deals have to get bigger - in which case the risk of overpaying and the complexity of integration go up - or Oracle has to spread its net wide and trawl for large numbers of smaller transactions.
There’s no question that Ellison’s consolidation play has been a huge success. The outcome of his current circling of the beleagured BEA Systems should give some idea of how long he can keep it up.
Footnote: What is the right measure of earnings for a serial acquirer like this, anyway? Oracle likes to boast about its pro-forma earnings per share. But as the deals have flowed, the amortisation of intangibles has picked up: 12 per cent of operating profits in the 2006 fiscal year, rising to 15 per cent in 2007.
Look at it another way. Back in 2004, Oracle’s earnings per share looked roughly the same on both a GAAP and non-GAAP basis. In the three years since, the pro-forma number has jumped by 98 per cent: the GAAP number is only up 62 per cent. Like too much Chinese food, all those deals start to show on the waistline in the end.
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