In perhaps the least shocking acquisition news in software history, Oracle has agreed to buy NetSuite for $US109 share, or about $US9.3 billion.
Larry Ellison already owned about 40% of NetSuite, so the deal will net him about $US3.5 billion.
Rumours had been recently circulating that Oracle would buy NetSuite.
Oracle doesn’t need NetSuite’s tech. It wants the company to increase its cloud computing revenues. Executive chairman Larry Ellison said in June he thought that Oracle could slingshot its way into making $US10 billion on cloud computing before its rival, Salesforce, hit that mark.
Salesforce is on track to do $US8.3 billion in revenue in its current fiscal year, it says, and analysts expect it to hit $US10 billion next year.
As for Oracle, in its last fiscal year, announced in June, it reported total cloud revenues of just under $US3 billion. Oracle is growing that part of its revenue base very quickly, and expects more than 65% growth in that business this year, co-CEO Safra Catz says. But that won’t bring it to $US10 billion before Benioff. It clearly needs big acquisitions for that. NetSuite is expected to hit $US1.2 billion in revenue in 2017, so that’s a help.
And Oracle may not be done with big acquisitions. In June the company sold $US14 billion in bonds. So it still has a few billion from that debt sale to shop with, plus about $US20 billion in cash.
Larry Ellison’s other company
Rumours that Oracle would eventually buy NetSuite have been circulating practically since NetSuite was launched way back in 1998.
NetSuite was the brainchild of Oracle cofounder Larry Ellison, born in the same meeting that gave Marc Benioff (who was an Oracle exec at the time) the idea for Salesforce.com.
NetSuite CEO Zack Nelson worked with Ellison, Benioff, and another key player, Evan Goldberg, at Oracle back in the 1990s. Goldberg thought up the idea of software as a service, says Nelson. Goldberg wanted to do customer relationship management software, that helps salespeople track customers and leads, as a service over the internet.
Ellison said the idea was interesting but told Goldberg that the first step would be to build finance software, and then build customer software around that. Goldberg agreed to do that and Ellison funded his startup. The company was born as NetLedger. It would later change its name to NetSuite. Ellison through its his venture funds, ultimately invested about $US125 million and still owned just under 40% of the company.
Benioff said he wanted to go build the CRM part and Salesforce was born. Ellison offered seed money to fund that, too, about $US2 million. But Ellison and Benioff began to feud almost immediately after that, as competition occurred between Oracle and Salesforce. And Benioff quickly kicked Larry Ellison off Salesforce’s board.
Ellison retained a lion’s share portion of NetSuite of nearly 32 million shares. At $US109 per share paid by Oracle, Ellison’s portion is worth $US3.48 billion ($US3,484,173,119).
Who else would buy NetSuite?
Because Oracle has for years competed in the same market as NetSuite, Ellison’s portion was held in a trust. One of the only things that Ellison is allowed to vote on directly is a change of control, according to documents filed to the SEC.
While the rumour mill had also said NetSuite could be a target by companies other than Oracle, Ellison’s giant stake in the company makes that seem unlikely. He wouldn’t want to sell it to a rival software company, for instance. And only a rival would spend $US9 billion to buy it.
In this case, Oracle says that the deal to buy NetSuite will only proceed if 50% of the shares not owned by Ellison agree to take part in the acquisition. Oracle offered a 19% premium over Wednesday’s closing share price, so investors will likely be happy to sell.
Rock + hard place = acquisition
NetSuite has another reason to sell. Oracle had originally aimed its cloud software at large businesses leaving NetSuite’s all-in-one cloud software geared toward smaller companies.
But as Oracle has been growing its cloud market, it has increasingly been reaching down into NetSuite’s turf, selling to small and mid-sized companies, Oracle co-CEO Mark Hurd likes to tell analysts.
That’s a rock and a hard place for Ellison. Either Oracle snuffs out NetSuite or NetSuite blocks Oracle.
This isn’t the first time that Oracle has bought a company that Ellison had a partial ownership stake in.
In 2011, Oracle bought storage company Pillar Data Systems, in which Ellison had a majority stake. That deal did not involve any cash upfront. Pillar’s owners were to be paid off by Oracle as they reached certain performance metrics.
Still investors bristled and pension funds in Michigan and Pennsylvania sued Oracle over the deal. As part of the settlement, Ellison agreed to give up his share of the payout for Pillar, potentially worth nearly $US575 million.
Investors have so far reacted with a “meh” to Oracle’s huge $US9 billion deal for NetSuite, one of the largest in Oracle’s history. The stock is trading about flat.