Oracle’s Takeover of PeopleSoft Lifts Sales but Pulls Down Profit in Latest Quarter
By winning a bidding war for software maker Retek Inc., Oracle Corp. and Chief Executive Larry Ellison proved that they could close deals.
Now Wall Street wants to see those deals pay off.
Hours after announcing Tuesday that it had agreed to buy Retek for $670 million, Oracle said that fiscal third-quarter earnings were dragged down by its bitterly contested, $10.3-billion takeover of PeopleSoft Inc.
Charges related to that purchase, which closed in January, pushed net income down 15% to $540 million, or 10 cents a share, in the quarter ended Feb. 28 from $635 million, or 12 cents, a year earlier. Boosted by PeopleSoft sales, revenue rose 18% to $2.95 billion.
Ellison has made it clear that he intends to bolster Redwood City, Calif.-based Oracle’s core database business by acquiring more companies in the lucrative market for business software, a strategy that puts the company in direct competition with industry leader SAP of Germany.
SAP was the other suitor for Minneapolis-based Retek, which designs software for retailers such as Best Buy Co., but Oracle bested every bid. Some analysts worry that Ellison’s determination to strike new deals may distract him from integrating PeopleSoft’s products and employees into Oracle.
Nathan Schneiderman, an analyst at Wedbush Morgan Securities, said he wouldn’t characterize the Retek deal as Ellison chasing targets “at all cost.” But, he said, “it sends a clear symbolic message that Oracle is very aggressive on acquisitions, although they should hunker down and focus on the acquisition of PeopleSoft.”
Acquisitions are difficult to pull off, Schneiderman said.
“Often they work, but generally there’s a bump along the way,” he said. “Oracle has potential to grow with the acquisitions of PeopleSoft, J.D. Edwards and Retek, but it’s adding revenue layers that are flat to declining, and that raises some concern.”
The Retek deal will help Ellison maintain Oracle’s No. 1 rank in North American sales of enterprise software programs that help businesses keep track of inventory, human resources, payroll and other back-office issues. But “Oracle needs to more clearly articulate what their [mergers-and-acquisitions] strategy is,” said Piper Jaffray & Co. analyst Tad Piper. “To date it’s been more reactionary and has cost them more in the end.”
Oracle said late Monday that it had outbid SAP for Retek, reaching an agreement to purchase it for $11.25 a share, topping the $11-a-share offer SAP made last week.
Shares of Retek fell 25 cents Tuesday to $11.21 on Nasdaq. They had been trading above Oracle’s offer as investors anticipated even higher bids before SAP dropped out. Oracle shares fell 16 cents to $12.49 on Nasdaq. They fell an additional 15 cents in after-hours trading after the earnings release.
Nonetheless, Ellison was upbeat about Oracle’s ability to grow and compete.
“Solid growth in our database business has enabled Oracle to take market share from IBM [Corp.] all year long,” Ellison said. “Oracle’s gain in market share highlights the accelerating acceptance of Oracle [products] as replacements for IBM mainframes.”
An improved outlook for the fourth quarter led the software firm to raise its fiscal 2005 forecast to an operating profit of 64 cents to 65 cents a share from 62 cents, said Safra Catz, co-president and acting chief financial officer, in a conference call with financial analysts.
