Tech Merger Making Progress
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In mid-December of 2012, Redwood City, California-based Oracle (NASDAQ: ORCL) announced its intention to purchase marketing software developer Eloqua (NASDAQ: ELOQ) in a cash-for-stock deal valued at over $800 million. Although some concerns have been raised about the technology giant's offering price as well as the sustainability of Eloqua's revenue stream, the deal appears on track to close before the end of the second quarter of 2013. Careful investors may be able to take advantage of news-related dips to pick up temporarily-discounted Eloqua shares.
About Oracle and Eloqua
Oracle is a hardware, software, systems and database manufacturer that operates in a number of different technology sub-sectors. Key services include Internet connectivity solutions, the Java software development platform, a cloud services division and corporate IT support. Founder Larry Ellison continues to run the company's day-to-day operations. Oracle employs 115,000 people and earned $10.6 billion on $37.2 billion in revenue in 2011.
Through its proprietary Eloqua Platform, Eloqua offers cloud-based marketing support and revenue tracking services. Its complicated revenue and marketing analysis tools enable medium-sized businesses to track the efficacy of their marketing programs and devise solutions to problems that arise during the course of a geographical expansion or product roll-out. As a young outfit, the company has yet to demonstrate profitability on a consistent basis. Although its fortunes have since improved, it lost $90.4 million on $90.1 million in revenue in 2011.
How the deal is structured
The terms of this merger are straightforward. Oracle has agreed to purchase all of Vienna, Virginia-based Eloqua's outstanding shares for $23.50 in cash. Once this has occurred, Eloqua will cease to trade as a public company and will become a wholly-owned subsidiary of Oracle.
Prior to the announcement of the merger, Eloqua was trading in a tight range on either side of $18 per share. Investors who purchased the stock during this one-month period stand to earn a return of more than 30 percent on their investment. After the announcement, the stock has risen to trade near $23.50 per share. However, several news-related dips have pushed its price below these levels on an intra-day basis. Investors who purchase the stock on these dips may earn a premium of up to 5 percent.
In late October of 2012, Eloqua traded as high as $24.65 per share in anticipation of an earnings beat. Although the company's report was even better than market-watchers expected, it could not sustain these valuations due to relatively high short interest. As such, it subsequently dropped to its pre-announcement levels. Prior to its fall 2012 run-up, the company traded in a tight range near $14 per share following its early-August IPO. Eloqua's briefly-elevated valuations form the basis of a lawsuit that could complicate the proposed merger.
On Jan. 3 , news broke about a pending lawsuit by an activist Eloqua shareholder. Using language common to such suits, the brief alleges that Eloqua's executive team and board of directors abdicated their fiduciary responsibilities to ensure a fair takeover price for the company. It goes on to accuse board members of accepting a simple deal over one that values the company fairly.
Given that Eloqua's stock traded above $23.50 for just a few sessions and that the company has been public for less than a year, the merits of this suit are unclear. However, it is possible that it will force Oracle's board to raise its offer. If this is the case, Eloqua may be substantially undervalued at its current price point.
Alternatively, Oracle's board could well decide that it would not be worthwhile to file a higher offer. In this case, the company might drop its bid and send Eloqua's shares back down to their pre-announcement levels.
At the moment, it appears unlikely that Oracle will pursue this second course of action. Unless the suit proves to have staying power in court, plans for the merger are likely to proceed as before. Given Eloqua's future growth prospects, Oracle should have no problem with issuing a slightly higher buyout offer in a pinch. As such, investors should watch this situation closely for any sudden movements.
Since the market's emergence from its post-financial crisis lows, Oracle has held up better than rivals like Intel (NASDAQ: INTC) and Hewlett-Packard (NYSE: HPQ). Both of these companies have been battered by the accelerating movement toward mobile interfacing and the increasing prevalence of cloud-based applications. For its part, Hewlett-Packard appears to be fighting a losing battle to remain relevant as a one-stop hardware and software provider. Apple’s laptops and the emergence of the tablet market have really hurt Intel and HP. Intel's PC-friendly chips are increasingly passé as they are not popular amongst the tablet manufacturers.
By contrast, Oracle has made a number of smart acquisitions that have increased its penetration in growth segments without alienating its shareholders or disrupting its core businesses. The Eloqua acquisition fits nicely within that strategy. In fact, Oracle may be making a shrewd move by buying out Eloqua at an early point in its life cycle. Although the company could yet prove to be a dud, Oracle is betting that Eloqua will ultimately provide a great deal of value. As such, investors who wish to profit from this deal without buying into Eloqua may find Oracle attractive at its current $35-per-share valuation.
In spite of the misgivings that surround the deal and the slight chance that legal hangups could delay or derail it, Oracle's acquisition of Eloqua makes sense. With a reputation for acquiring promising new companies and subsuming them into its corporate ecosystem, Oracle could derive tremendous long-term benefits from this merger. Meanwhile, existing Eloqua investors will earn a solid return on this deal. In the months that precede the deal's closing, investors would do well to watch Eloqua closely and prepare to pull the trigger in the event of an unexpected temporary dip in its share price.
mthiessen has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!