Oracle Has Perfected the Art of the Acquisition

Implications: Growing by acquisition at some level seems like an easy approach to taking over much of the market, yet repeated failures through the years in various businesses have clearly demonstrated it is a road laden with minefields.  Oracle has figured out how to avoid those minefields and appears set to become THE dominating force in enterprise software. 

Analysis: Growing by acquisition is easy.  It just requires money and determination.  So why doesn’t every successful company use it more?  There are a lot of successful companies that have money, yet rarely make major acquisitions.  Contrast that to Oracle, with its 40 acquisitions in the last 14 months, some of which have been quite large.  The difference is the ability to smoothly integrate those acquisitions and take advantage of the synergies to create a larger, more profitable business.  Cisco has long used acquisitions to fuel their growth strategy, although in their case it has primarily been about acquiring smaller companies to obtain technology.  EMC and Symantec are also notable examples of large companies growing by acquisition.

The real test of a successful acquisition strategy is how easily the acquired company is integrated, and how quickly does the combined combine show increased revenues and profits.  Cisco has never shown any major hiccups in the process, partly because they long ago formularized the integration approach, and partly because those few acquisitions that failed were small enough nobody noticed.  EMC struck a home run with VMWare, which has arguably contributed more to EMC’s market cap than any other single effort EMC has done in the last few years.  By contrast, Symantec’s acquisition of Veritas a couple of years ago seems to have caused major indigestion.

Oracle was not a neophyte at the acquisition game when they acquired PeopleSoft, but neither were they seasoned pros, so their first steps were not always correct.  However, a key feature of Oracle that many people miss is their ability to learn from both successes and mistakes.  Oracle makes perhaps as many mistakes as any other large company, but they are able to minimize the damage from their mistakes and learn from them so such mistakes are not repeated.  Whenever Oracle repeats something they get it right.  By now they have a successful formula for acquiring and integrating companies.

First of all, they select the people they want to keep, typically development, support and sales people, and make their future with Oracle so attractive few leave.  Secondly, they provide solid product roadmaps into the future both with the current company’s products alone, and integrated into the overall Oracle product mix.  Customers are comforted by the knowledge they have choices:  they can stay on the same products and be certain of support for the foreseeable future, or they can migrate to the integrated Oracle product suite when they wish.  Consequently, customers see more rather than fewer options and rarely leave the fold.  Finally, Oracle strips out as much as possible of the G&A and other overhead functions from the acquired company, and provides those functions from combined corporate resources at a reduced cost.

Everyone wins with this approach, but most of all Oracle wins.  They get new customers, they get synergies from greater size, they get cross-selling opportunities, and most of all they get an increased revenue stream.  Perhaps the most common concern voiced by customers and analysts is whether Oracle will continue supporting legacy applications, as they have stated they will.  In fact, this is a very lucrative business for them and allows them both customer satisfaction and a solid revenue stream.  As products age the support costs get reduced over time, yet Oracle will maintain and even increase maintenance charges for those products. 

Oracle’s ongoing support of older applications is a cash cow that provides a solid cushion to insulate them from the side-effects of any economic downturns.  License revenues may drop as the economy suffers, but maintenance and support will be solid.  At the same time, Oracle’s wide suite of applications allows them to surround and perhaps eventually strangle all competition in enterprise apps.  Although controversial, Oracle’s acquisition strategy seems poised to make them THE dominant player in enterprise software.