Oracle Skips Expensive Targets to Buy Micros: Real M&A

June 23 (Bloomberg) -- Kleinberg Kaplan Head of M&A Christopher Davis and Sullivan & Cromwell Senior M&A Partner Frank Aquila examine the Oracle-Micros and General Electric-Alstom deals. They speak with Trish Regan, Jeffrey McCracken, and Jonathan Ferro on “Street Smart.” (Source: Bloomberg)

While expensive mobile-app deals are hogging the spotlight this year, Oracle Corp. (ORCL) shows you don’t have to pay up for all tech targets.

The big takeovers in technology this year have centered on purchases of popular, fast-growing companies such as OpenTable Inc. and WhatsApp Inc., both of which commanded high valuations. As acquirers scour for growth -- be it in mobile applications, websites or cloud-computing systems that power businesses -- Oracle opted instead for Micros Systems Inc. (MCRS), a cheaper, lesser-known software provider.

Oracle yesterday said it agreed to buy Columbia, Maryland-based Micros in a transaction valued at $4.6 billion, or 17 times Micros’ earnings before interest, taxes, depreciation and amortization. That compares with a median multiple of 22 for Internet and software acquisitions, according to data compiled by Bloomberg. The 20 percent premium being offered to Micros shareholders also ranks among the lower takeover premiums of the past four years, the data show.

Related: Le Cirque Software Need Helps Prompt Oracle's Micros Deal

“Oracle’s strategy has been a smart one, which is to buy good assets at a good price,” Brent Thill, a San Francisco-based analyst at UBS AG, said in a phone interview. “It’s not an expensive deal relative to other multiples that are out there. It’s a decent margin business and Oracle probably thinks they can take it higher.”

Photographer: Tomohiro Ohsumi/Bloomberg

Larry Ellison, chief executive officer of Oracle Corp. Oracle, after a late entry to the cloud-computing market, has acquired more than a dozen companies since the beginning of 2013, data compiled by Bloomberg show. Close

Larry Ellison, chief executive officer of Oracle Corp. Oracle, after a late entry to... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Larry Ellison, chief executive officer of Oracle Corp. Oracle, after a late entry to the cloud-computing market, has acquired more than a dozen companies since the beginning of 2013, data compiled by Bloomberg show.

Ramping Up

Microsoft Corp., International Business Machines Corp. (IBM), SAP AG and Oracle are probably among those looking to ramp up in areas such as big data, cyber security and the cloud, according to Daniel Ives, a New York-based analyst at FBR & Co. Imperva Inc., Qlik Technologies Inc., Tableau Software Inc. and Splunk Inc. are possible targets, he said.

Representatives for Oracle, Microsoft, IBM and SAP declined to comment on their acquisition plans.

Oracle fell 0.8 percent to $40.76 today. Qlik dropped 1.9 percent to $22.60, Tableau rose 0.8 percent to $69.89, while Splunk increased 0.3 percent to $52.63.

Oracle, after a late entry to the cloud-computing market, has acquired more than a dozen companies since the beginning of 2013, data compiled by Bloomberg show. In December, the $183 billion company agreed to buy Responsys Inc. for $1.5 billion, representing a 48 percent premium to the target’s average price in the 20 days leading up to the deal announcement. Its takeover last year of Acme Packet Inc. for about $2 billion was a 24 percent premium, while the purchase of Eloqua Inc., announced in 2012, represented a 32 percent premium.

Wembley Stadium

Micros, Oracle’s fourth-largest acquisition, provides software for hospitality and retail businesses such as Starwood Hotels, Ikea, SeaWorld and London’s Wembley Stadium, as well as restaurants like TGI Friday’s and Ruth’s Chris Steakhouse. The programs handle tasks including revenue management, point-of-sale operations and fraud prevention. The company is trying to boost sales in the cloud, as well as applications for use on mobile phones and tablets.

While it’s the biggest tech deal this year after Facebook Inc. bought WhatsApp for about $19 billion in February, there’s a big valuation gap between the two transactions. Facebook’s offer valued WhatsApp at about 19 times estimated sales, a multiple typically reserved for drugmakers developing treatments for cancer, according to a Bloomberg News analysis at the time. WhatsApp wasn’t earning money.

Relative Value

Oracle’s bid for Micros values it at 3.5 times trailing 12-month revenue and 17 times trailing 12-month Ebitda, cheaper than the median multiples buyers have paid for Internet and software acquisitions larger than $1 billion, data compiled by Bloomberg show.

At the same time, Micros isn’t growing as quickly as WhatsApp, Thill of UBS said. Micros’ revenue probably climbed 8.1 percent to $1.37 billion in its fiscal year ending this month, and may grow an additional 6.8 percent to $1.46 billion the following year, according to analysts’ estimates compiled by Bloomberg.

WhatsApp may increase its monthly users from 450 million to over 1 billion in the next few years, Facebook Chief Executive Officer Mark Zuckerberg said in February. Subscribers are charged 99 cents a year after a first year free, which would translate into about $1 billion of annual sales for WhatsApp, which had negligible revenue when the deal was announced.

Micros Opportunity

For Oracle, buying Micros may have more to do with the opportunity it sees. It will be delving deeper into the market for application software for retailers and hotels, Brian White, a New York-based analyst at Cantor Fitzgerald LP, wrote in a report yesterday.

The deal supports Oracle’s “focus on specific verticals,” or areas, such as retail and hospitality, White wrote.

“Over the past couple of years, Oracle has discussed ambitions to become a leading supplier in specific industry verticals, including financial services, retail and telecom,” according to White.

Oracle didn’t overpay for Micros, though the company is likely to make more acquisitions, Ives of FBR said. On June 20, its shares dropped the most in a year after quarterly profit and sales missed analysts’ estimates amid efforts to catch up with competitors in cloud computing. Sales have increased by less than 5 percent in each of the past 11 quarters and analysts forecast growth will stay subdued over the next few years.

“Oracle needs to continue to be aggressive on acquisitions to put more fuel in their growth tank,” he said. “Given the choppy results we’ve seen over the last year or two, I see more acquisitions on the horizon.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net; Pui-Wing Tam at ptam13@bloomberg.net Whitney Kisling

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