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No. 27: Oracle

Say what you will about Lawrence J. Ellison, Oracle Corp.'s (ORCL) often controversial chief executive, but he's not afraid to change his mind. For most of the software giant's 30-year history, co-founder Ellison believed that acquisitions were a stupid way to expand a software company. His thinking abruptly changed three years ago when he decided the $150 billion corporate-software industry was mature and needed consolidation. Since then, Oracle has spent nearly $24 billion to buy 30 companies, including the just-announced $3.3 billion takeover of Hyperion Solutions Corp. (HYSL).

That string of acquisitions helped boost Oracle's annual revenues by more than 50%, to an estimated $17.7 billion, for the fiscal year ending in May. But it's too early to tell if Ellison's gamble will be a major success. By spending nearly as much on M&A in three years as Oracle has made in profits over three decades, Ellison has put the company on a more equal footing, in size, with rivals SAP (SAP) and IBM (IBM). Now, Ellison has to prove he can manage this big, complex company. Among his chief challenges: Combine the best of the technologies from many of his acquisitions into an ?bersuite of applications, called Fusion. "We like Oracle's strategy, but it will take years to tell if all this spending is going to pay off," says analyst Brent Thill of Citigroup (C).

Ellison's strategy is more nuanced than it may appear. A lot of excitement was generated by Oracle's buyouts of PeopleSoft and Siebel Systems, amounting to $16 billion combined. The two were Oracle's rivals in the market for corporate applications such as accounting, HR management, and customer relationship management. Oracle collects huge annual maintenance fees from PeopleSoft and Siebel customers, which analysts figure will help it achieve 20%-plus growth in annual earnings per share. But what about revenue growth?

That's where the other acquisitions come in. The purchase of Hyperion, which makes business intelligence software, fills one gap in Oracle's product portfolio. Other buys were designed to help the company expand rapidly in corporate software markets that are still immature. But Oracle's largest revenue opportunity lies in providing software designed for specific industries. It has gradually created soup-to-nuts product offerings for five segments: retail, financial services, utilities, communications, and government. Until recently most of those types of organizations designed their own programs to run core operations. Now many are switching to off-the-shelf software applications that are designed specifically for their needs and that can be customized to fit even better.

Oracle has used acquisitions to quickly build expertise in those areas. Consider its strategy in going after the market for packaged retailing software--programs designed to appeal to a large number of retailers rather than being written for specific customers. That business is expected to grow from $7.4 billion last year to $9.3 billion in 2009, according to analyst Rob Garf of AMR Research Inc. Oracle snatched retail software market leader Retek Inc. out from under SAP's nose two years ago, then snapped up two smaller companies, ProfitLogic and 360Commerce, to pull together a suite of retailing software.

That helped Oracle win 30 new retail customers in the past 12 months, including Wal-Mart (WMT), Nordstrom (JWN), and Perry Ellis (PERY) International. Last quarter, Oracle's sales of retailing software tripled, albeit from a relatively small base. "We have a tremendous amount of momentum now," says Duncan B. Angove, a Retek veteran who now runs Oracle's retail applications business.

Oracle's win at Perry Ellis shows why its retail business is catching fire. The Miami-based fashion house was hoping to replace antiquated software by selecting so-called best-of-breed products from a handful of suppliers. After Oracle bought Retek, ProfitLogic, and 360Commerce, Perry Ellis could fulfill all of its software needs from one source. "They had the product with all the solutions," says Luis Paez, chief information officer at Perry Ellis, who expects to save more than $20 million a year with just-in-time inventory controls, improved merchandising, and software that helps stores set the optimal price at which to sell merchandise, thanks, in part, to Oracle's software.

SAP is no pushover, though. The two software giants are like Sumo wrestlers struggling to gain advantage, and SAP is way ahead in fashioning software packages for individual industries. It has 26 to Oracle's 5--which helps explain why it captured 21.9% of the corporate applications market last year to Oracle's 11.8%, according to AMR. Oracle has signaled that it will buy more companies to keep revenues and market share growing. But that puts ever more pressure on Ellison to make his huge investments pay off.

By Steve Hamm

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