Oracle Corporation made its second largest acquisition to date today. It acquired cloud-based software provider, partner and customer NetSuite in a transaction valued at approximately $9.3 billion, or $109 per share in cash, Redwood City, Calif.-based Oracle announced.
Oracle's acquisition of NetSuite lands it a spot among the largest tech deals of all-time, where it joins Oracle's 2005 acquisition of PeopleSoft for $10.3 billion. That acquisition included an attempt from the US Government to block the merger based on antitrust issues.
Long-Standing Relationship with Oracle
NetSuite, founded in San Mateo, Calif. in 1998, lays claims to being the first cloud company. An existing cloud partnership with Oracle was bolstered three years ago when the companies bundled Oracle’s HCM Cloud with NetSuite’s Cloud enterprise resource planning (ERP) solutions.
NetSuite develops its ERP, customer relationship management (CRM) and other offerings on database software licensed from Oracle.
NetSuite, Inc. purchased approximately $3.1 million in cloud software subscriptions, license and hardware support, education and other services from Oracle in Fiscal Year 2014, according to United States Securities and Exchange Commission (SEC) files. The same year, Oracle paid NetSuite approximately $359,000 for services primarily related to companies Oracle acquired that previously used NetSuite’s software offerings.
It wouldn't be an Oracle deal without Larry Ellison's money stamp. There's a great chance he pushed the button on this one, or at least gave the orders.
Ellison famously in 2012 said NetSuite was his idea, and called Salesforce a cloud copycat.
The former Oracle CEO — and current executive chairman and CTO — owned up to 47.4 percent stock in NetSuite as of Dec. 31, 2014, according to an SEC report. Ellison invested $125 million in the startup in 1998 to help former Oracle colleague and NetSuite founder Evan Goldberg.
"Ellison is able to exercise control over approval of significant corporate transactions, including a change of control or liquidation," NetSuite officials wrote in the SEC document. "Ellison’s significant interest in us could discourage potential acquirers or result in a delay or prevention of a change in control of our company or other significant corporate transactions, even if a transaction of that sort would be beneficial to our other stockholders or in our best interest and, as a result, reduce the market price of our common stock."
Clearly this didn't discourage Ellison's own company from buying NetSuite for $9.3 billion. The closing on this deal is subject to a condition that a majority of NetSuite’s outstanding shares not owned by executive officers or directors of NetSuite, or those affiliated with Larry Ellison, his family members and any affiliated entities, be tendered in the tender offer, according to Oracle officials.
The Cloudier, the Merrier
NetSuite officials claim NetSuite was the first company to provide a cloud-based integrated suite of business management applications that address the needs of medium-sized businesses in the manner that Oracle and SAP address the similar needs of large enterprises, they said in a 2014 SEC filing.
By acquiring all of NetSuite's assets, Oracle gets a "complementary" set of cloud applications into which Oracle intends to "invest heavily in both products —engineering and distribution," according to Oracle co-CEO Mark Hurd.
“Oracle and NetSuite ... will coexist in the marketplace forever,” he said.
'A Matter of Time'
The move didn't shock many. Rumors surfaced earlier this month about the deal.
"I always figured this was a matter of time," Denis Pombriant, managing principal of Stoughton, Mass.-based Beagle Research Group, told CMSWire. "It was textbook 'Innovator's Dilemma.' NetSuite as a free-standing company enabled Larry Ellison to prove the concept of cloud ERP without confusing Oracle's customer base."
The deal, Pombriant added, gives Oracle "another arrow in the quiver as competition from all over the map is attempting to co-opt the big ERP vendors like Oracle and SAP by offering two- or three-tier strategies of surrounding older and brittle ERP with nimble, quick cloud solutions."
"It made perfect sense," Pombriant said. "Hats off to (NetSuite CTO) Evan Goldberg, (CEO) Zach Nelson (in title image) and the gang in building a strong company and steering it to this conclusion.”
Sheryl Kingstone, research director of business applications at New York City-based 451 Research, called NetSuite a "great purchase" for Oracle and a solid Software-as-a-Service (SaaS) offering.
"It’s all about penetrating the mid-market with not only a strong back-office platform, but also e-commerce and some CRM and marketing assets with the Bronto acquisition," Kingstone told CMSWire. "Customer retention is strong with solid expansion to businesses running their entire companies on NetSuite. And let's not forget Larry owned roughly 45 percent of the company."
Evan Goldberg, founder, chief technology officer and chairman of NetSuite, said in a statement that NetSuite has been working for 18 years to develop a single system for running a business in the cloud.
“NetSuite will benefit from Oracle’s global scale and reach to accelerate the availability of our cloud solutions in more industries and more countries,” Nelson added. "We are excited to join Oracle and accelerate our pace of innovation.”
Subject to customary closing conditions, including shareholder and regulatory approvals, the transaction is expected to close later this year.