Taleo's Nice, But Oracle Needs to do Better Than That
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Oracle’s $1.9 billion purchase of the online HR firm Taleo is yet another move to make strides in the Cloud marketplace. And diving into the Cloud space makes perfect sense as there is every indication it could provide explosive growth potential.
As you can imagine, with opportunity comes competition and Oracle (NASDAQ: ORCL) is hardly alone. Google (NASDAQ: GOOG) embraced Cloud technologies early on and is firmly entrenched as a solutions provider. As we talked about in a previous article, Microsoft (NASDAQ: MSFT) has not tiptoed into the market by any means either. They’re in hook, line and sinker with a suite of Cloud products and are aggressively going after the lucrative small to mid-sized business market. IBM is another industry mainstay aggressively going after market share. Though on a smaller scale than acquiring Taleo, IBM (NYSE: IBM) also announced the purchase of DemandTec for a few hundred million not too long ago.
Taleo Acquisition
At first glance it appears Oracle got a pretty good deal -- paying Taleo shareholders a meager 18% premium. Compared to some recent valuations for Cloud-related acquisitions, that’s an absolute steal. But before management starts patting themselves on the back too heartily, it should be noted the company was already way overpriced, trading for as much as 40+ times earnings -- so maybe not such a steal after all.
If you haven’t heard of Taleo software, it helps companies manage and track that all-elusive human capital and is a big player in the field. It’s a strategic move by Oracle management that follows the same path the company took with the $1.4 billion acquisition of RightNow Technologies a few months ago.
Oracle Outlook
Fundamentally Oracle on a year-over-year basis is on a roll. Multiple years of consistent revenue and net income growth are a testament to the company’s current valuation. But there are a couple of concerns for new investors – at nearly 16 times earnings Oracle is not necessarily overpriced. However compared to others in the industry, Microsoft in particular, they’re not cheap either. It could be argued Oracle's stock price is about where it should be right now.
The bigger concern is the cash – lots and lots of cash. At year’s end Oracle was sitting on $31 billion -- that’s $6 for each man, woman and child with an outstanding share of Oracle stock. Whew. For a company that pays a dividend of less than 1% that’s money that needs to get to work creating additional shareholder value. Repurchasing shares, making larger, substantive acquisitions that positively affect the bottom line – something. A billion dollars is nothing to sneeze at, but for a $145 billion company with that kind of cash, it’s going to take a lot of those acquisitions to significantly impact earnings.
Oracle offers investors some upside potential, certainly. But to really unlock company value it’s time to make some decisions -- bigger decisions than buying $1.9 billion Taleo. Until then, stick with Microsoft.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.
