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Larry Ellison's Roving Eye

By Steve Hamm Conventional wisdom says big tech acquisitions don't work. Well, Oracle (ORCL) Chief Executive Lawrence Ellison says nuts to that. When the world's No. 2 software maker reported fourth-quarter earnings on June 29 -- the first to completely incorporate results from Oracle's $10.3 billion acquisition of rival PeopleSoft -- combined sales of their corporate application products were up 52%. That means Oracle pulled off quite a smooth merger in short order.

It also clears the decks for more of the same. Ellison downplayed acquisitions after the earnings report, telling BusinessWeek, "We have no plans to buy anything that doesn't contribute to our five-year plan to grow profitability by at least 20% per year." (See BW Online, 6/30/05, "Oracle's Squeeze Play for Profits".)

Yet, in practically the next breath, he laid out his strategy for buying software companies with narrow profit margins but rich maintenance-revenue streams, adding them to Oracle's portfolio, and stripping out costs. "We can run the same business at a 40% margin. That's why we buy them."

FUSION FIRST? While Ellison won't comment on potential targets, all signs point to more mergers. Two likely targets are troubled customer-management software maker Siebel Systems (SEBL) and business-intelligence software maker Hyperion (HYSL).

Oracle has $5 billion in the bank, so it has the wherewithal to make a sizable deal. Plus, it just hired Chief Financial Officer Greg Maffei, who oversaw a string of 21 acquisitions during his 2 years as CFO of Microsoft (MSFT) between 1997 and 2000. "If you can buy them at the right price and execute right, there are dozens of companies we're looking at," says Ellison.

Most Wall Streeters are urging caution. "Siebel would be a good addition because it brings $1 billion in maintenance revenues. But there's no reason to rush," says analyst Brendan Barnicle of Pacific Crest Securities. "The Street wouldn't like it." Barnicle says it would be better for Oracle to first finish its so-called Fusion project -- melding together the best features of Oracle and PeopleSoft applications in completely new software code. That project is expected to take about three years.

KILLER APS. Don't be surprised if Oracle makes a move on Siebel much sooner than that, however. The outfit certainly fits Ellison's target profile. "They have a big installed base. They have soft financials, so margins are down," says analyst Tom Berquist of Smith Barney Citigroup. "It would be easy for Oracle to clean up the profit margins. They could get those support revenues and make it very profitable right away."

Ellison says he hasn't talked to Siebel Chairman Tom Siebel or CEO George Shaheen recently. But he revealed that Siebel came to his home to talk about selling his company to Oracle about 18 months earlier. This was when Oracle was in the midst of its hostile takeover of PeopleSoft.

The talks didn't go anywhere, however. "I didn't think Siebel was nearly as interesting a target as PeopleSoft, and we were knee-deep in the PeopleSoft pursuit," Ellison explains.

While most of Oracle's 10 acquisitions over the past 18 months have been in its core database and middleware segments, analysts and investment bankers are urging it to be more aggressive in applications. That's where it faces what Ellison readily admits is its toughest competitor -- Germany's SAP (SAP).

AREAS OF STRENGTH. Peter Falvey, a partner at Boston investment bank Revolution Partners, says Oracle needs to diversify. "It still gets 75% or 80% of its revenue from the database business," he notes. "That needs to change, even though the company is very successful at the moment."

Oracle doesn't have to do anything very quickly. It's the database leader, it's coming on strong in middleware, and it now has a much stronger position in the applications business. But given the kind of bold moves that Ellison is prone to make, another merger deal could be on the way. Hamm is a senior writer for BusinessWeek in New York

with Steve Rosenbush in New York

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