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Look into the Oracle

14 September 2005  |  1544 views  |  0 Source: Hadley Reynolds, Delphi Group

Hadley Reynolds, senior consultant and head of research at Delphi Group - a Perot Systems Company - analyses the implication of Oracle's takeover of Siebel.

Summary:
Oracle and Siebel announced that Oracle will acquire Siebel for approximately US$5.85bn. The offer represents a valuation of Siebel's business operations of $3.6bn, net of Siebel's $2.2bn cash on hand. Siebel's management and board support this transaction.

After spending the bubble years as the darling of the enterprise application market, sporting growth rates and market valuations that were the envy of the enterprise software space, Siebel has struggled in recent years. With software sales less than half of 2000 levels, both revenue and earnings have been under pressure, and growth has ceased to be a feature in the company's story.

The two biggest factors which have impacted Siebel's fortunes are 1) general lack of satisfaction with the value CRM software has delivered to the enterprise; and 2) increased competition from alternative sources, including startup specialists, new formats (note popular Internet service Salesforce.com), and perhaps most importantly SAP, whose CRM module has experienced high rates of growth over the past several years.

With SAP tempting and converting Siebel's traditional enterprise customers and Salesforce.com redefining the competitive model for the higher-growth SMB space, Siebel's growth plans have stumbled. Its much-touted ASP-delivered competitive response to Salesforce.com (with its IBM patnership) has not made a significant impact on the market. Following Siebel's disappointing first quarter, its recently proposed turn-around strategy was DOA. With the hiring of George Shaheen as CEO, someone who has never run a software company without trucks, this sale was the inevitable exit strategy.

Oracle had been the rumored suitor all year, and it is a logical choice, with the exception of the personal history between Ellison and Siebel. But Oracle's venture to roll up aging enterprise software assets begs the question of whether it has bought the foundational pieces for the next killer 'suite', or instead assembled the remnants of an outmoded business model that has not delivered adequate value to enterprise customers.

While the industry sorts out that issue, and Oracle plots its ever more complicated transition strategy to SOA, Siebel customers can now join Peoplesoft's and JD Edwards' in an anxious period of waiting to see how Oracle's stated goals of Project Fusion (the code name for Peoplesoft software integration efforts) will ultimately impact their businesses.

Oracle states that the Siebel acquisition will support the firm's overall goal of 20% annual earnings growth. As Siebel has struggled to demonstrate any positive earnings in the past several years, the Siebel plan, like the Peoplesoft/JD Edwards plan before it is based on jettisoning the workforce and reaping the expense-side benefits of reduced payroll.

The jury will be watching closely to see whether Oracle's promises of continuing product support and innovation will survive its earnings growth goals. In the meantime, Siebel customers can look for the SAP guaranteed transition offer in their emails momentarily.

Details:
At an offer price of slightly more than 4x recent annual revenues, Siebel shareholders will be getting just pennies less than the stock's 12-month high, and approximately a 35% premium on the market's current opinion of the enterprise value of the company.

Oracle states:
"We expect this transaction to be accretive to Oracle's earnings on a non-GAAP basis in its first full year (FY07)," said Oracle President and CFO Greg Maffei. "Longer term, Siebel will contribute to Oracle's stated goal of 20 percent annual earnings growth. Given the size of our existing RandD investment, scale of our global support infrastructure, and similarity of our back office requirements, we will recognise substantial efficiencies from combining our two businesses."

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