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Oracle: Consolidation Catalyst?

Larry Ellison is spending $3.3 billion on Hyperion to turn up the heat on SAP; more deals in the business-intelligence software sector are likely

After a four-month respite, Oracle (ORCL) Chief Executive Larry Ellison returned to his acquisitive ways, snapping up software maker Hyperion Solutions (HYSL) on Mar. 1 for $3.3 billion in cash. The deal is designed to put the hurt on rival SAP (SAP), and it's likely to trigger more buyouts in the fast-growing market for data-analysis software. But Oracle's latest purchase could also open new fronts in Ellison's wars with IBM (IBM) and Microsoft (MSFT) and incite competition with hardware companies that have traditionally left Oracle alone.

Oracle has spent some $20 billion over the past three years to acquire more than 25 software companies. The company needs to buy growth as the market matures for database software and competition with SAP heats up in applications, the software used to help businesses manage everything from payroll to inventory. Hyperion—a maker of software that helps companies distill reams of business data into reports they can use to plan budgets, close their books, and spot profitable customers—will give Oracle's results a shot in the arm. The target booked $765 million in sales last year, and Oracle expects the deal to add a penny a share to earnings in the fiscal year that ends in May, 2008, and 4¢ a share in 2009. It could also help Oracle snare accounts from its German rival; more than half of Hyperion's customers also use SAP.

"Everybody's looking for information and insights about their business," says Bruce Richardson, chief research officer at AMR Research. "This is an area where SAP is starting to admit, 'We need to do a lot more work.'"

Appealing Targets

Now, the question is which makers of so-called business-intelligence software—a category relatively untouched by the wave of consolidation sweeping the industry—will be acquired next. The answer could shift the tectonics in the IT market as both hardware and software purveyors try to sell their customers products that can help them reap more information from the technology they already own. "The dam has burst in this sector," says Murray Beach, president of Boston Corporate Finance, an investment bank that advises technology companies. "Business Objects can't be far behind."

Bankers and analysts expect business-intelligence software makers Business Objects (BOBJ) and Cognos (COGN) to be acquired this year. Potential buyers include SAP, IBM, Hewlett-Packard (HPQ), and EMC Corp. (EMC). Customers of IBM, HP, and EMC are pushing their executives in finance, sales, and operations to provide better insight into corporate performance, and none of those vendors has the best business-intelligence technology on the market, says Beach (see, 2/28/07, "HP's New Soft Spot for Software").

Also on the block could be Teradata, a maker of data warehouse systems that is being spun off by parent NCR Corp. (NCR). And OutlookSoft, a Stamford (Conn.) maker of software for planning budgets and forecasting financial results that's backed by funding from General Electric (GE), Merrill Lynch (MER), and Greylock Partners, is "ripe for acquisition," says Brian Farrar, a managing director at Innovation Advisors, a Chicago investment bank that advises technology companies on mergers and acquisitions. Farrar pegs data analysis as one of the richest areas for IT spending in the next five or six years. Having gorged on enterprise resource planning systems in the 1990s, chief information officers "need to squeeze more decision-making power out of the infrastructure they already have," he says.

Overall, the market for data-analysis software was worth nearly $23 billion in 2006, according to AMR—about half the size of the business applications market, which has boomed over the past two decades. Subsets of the category are growing fast: Sales of business-intelligence software grew 10% to $6.35 billion, and sales of "scorecard" software that helps busy executives glance at key numbers shot up 26% to $5.2 billion. Another growth area: analysis of "unstructured data" such as insurance claims or transportation schedules that don't reside in traditional databases (see, 5/15/06, "Business Intelligence Gets Smarter").

Strategic Choice

Plucking Hyperion helps Oracle pressure SAP in several ways, says Richardson. For starters, about 55% of Hyperion customers also use SAP, he estimates. And business-intelligence software can "burrow deeper" into a company once it's installed, as users demand more data—and pony up for additional licenses.

The formula added up for Oracle. "Thousands of SAP customers close their books with the Hyperion product," Oracle President Charles Phillips said during a conference call with analysts on Mar. 1.

Oracle said it will pay $52 a share, about 21% higher than Hyperion's Feb. 28 closing price. Shares of Hyperion closed Mar. 1 up $8.73 at $51.57. Shares of Oracle closed 34¢ higher, at $16.77. The deal is due to close in April.

Oracle's acquisition binge the past few years has included PeopleSoft for $10.3 billion in 2004 and Siebel Systems for $5.9 billion in 2006. Oracle bought I-flex Solutions of India for $909 million in 2005, and in November added a pair of software companies, Stellant and SPL WorldGroup.

Kash Rangan, a research analyst at Merrill Lynch, said in a Mar. 1 research note that it's unlikely Oracle will choke on integrating yet another company judging from its track record. And the deal should give Oracle a boost in applications revenue as it faces tough financial comparisons with historic performance, he said. Sales of applications licenses during Oracle's second quarter ended Nov. 30 grew 28%, but fell short of Wall Street expectations. Oracle executives weren't available for comment, a spokeswoman said.

Other Big Fish

What could cause problems are new competitors. In addition to hardware vendors hoping to add analytics to their portfolios, Microsoft has been getting more aggressive in the market and undercutting competitors on price. Microsoft bought business-intelligence vendor ProClarity last year; it's preparing to release a new product called PerformancePoint Server this year that could make analysis of financial and operational data accessible to more users of its ubiquitous Office suite.

Even Google (GOOG) is dipping its toe into the data-analysis market. The latest version of its Search Appliance server includes software called OneBox that gives users access to data from business-intelligence systems from Cognos and others by typing keywords into the Google search bar.

And the pond may not be completely fished out. While the core market for analytics software is saturated, there are opportunities for small companies that can supply niche applications, such as those helping companies understand the return on their marketing and advertising spending, says Robert Ketterson, a managing partner at Fidelity Ventures. "I don't think business intelligence is dead," he says. "There's always an opportunity for venture [capital] in a space where consolidation wipes the bigger players from the map."

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