Oracle, EBay Snap Up Firms to Compete
Oracle Corp. and EBay Inc. went on a $10-billion shopping spree Monday -- the latest in a series of acquisitions that signal the buy-or-be-bought outlook of a maturing Silicon Valley.
Oracle, which has closed seven other deals since January, bought Siebel Systems Inc. for $5.85 billion to eliminate a big rival in corporate software and position itself to challenge market leader SAP. EBay agreed to pay as much as $4.1 billion for Skype Technologies, a small but fast-growing company that allows users to make Internet phone calls that the online auctioneer hopes will drive expansion overseas.
Although the rationales of the deals differ, behind both acquisitions is a feeling that the high-tech and Internet landscapes increasingly will be controlled by those big enough to compete globally. To do so, companies big and small feel compelled to constantly expand their offerings by branching into new businesses.
“There is a very strong sense that five years from today, this landscape will be very different,” said Ken Marlin, managing partner of Marlin & Associates, an investment bank focused on media and technology deals. “Winners are being defined, and there is a closing window of opportunity for people to ensure that they are among those winners.”
Ironically, many of the busiest buyers are companies that just a few years ago were tiny start-ups whose ideas challenged established tech titans such as Microsoft Corp. In addition to EBay, which started in a San Jose living room, big spenders include Yahoo Inc. and Google Inc., both of which were founded by Stanford University graduate students.
The deals also suggest to some analysts that big companies are optimistic about the economy even in the face of Hurricane Katrina and soaring energy prices. Overall, U.S. companies are on track to spend $1 trillion on mergers and acquisitions this year, the highest level since 1999, according to Merger Insight, an affiliate of New York brokerage firm Wall Street Access. About 8% of the total dollar value comes from technology -- more than double last year, said investment banking firm Barrington Associates.
“These transactions are really a bet on continued economic growth,” said Merger Insight President Tom Burnett.
And the hope among investors is that they may also give languishing stock prices a boost. Although both EBay and Oracle generate billions in cash every year, the value of their shares has stagnated along with those of many other profitable tech companies widely considered to have slowed their growth after the boom of the 1990s.
Google branched out from its search engine by acquiring, among other businesses, the Picasa photo management service, the Keyhole digital mapping service and the Dodgeball.com social networking service, all for undisclosed prices. Yahoo snapped up the small software companies Konfabulator and WUF Networks. Microsoft bought Teleo Inc. for its voice over Internet protocol service and FrontBridge Technologies Inc., an e-mail security company. For its part, EBay paid $620 million for online shopping service Shopping.com and $415 million for Web classified site Rent.com.
Other companies on a buying spree include Sun Microsystems Inc., which purchased Storage Technology Corp., a maker of tape drives and backup software, this summer for $4.1 billion. Adobe Systems Inc. in August bought Macromedia Inc., a graphics and animation software company, for $3.4 billion. Security software maker Symantec Corp. in July bought Veritas Software Corp., a storage software company, in an all-stock transaction worth $10.3 billion.
“This is playing out all over,” said David Hilal of Friedman, Billings, Ramsey & Co.
But there’s no guarantee that simply getting bigger will work, as America Online’s acquisition of Time Warner Inc. in 2000 demonstrated. The combined company is still struggling to capture the hoped-for benefits.
“What drives the success or failure is how well thought out the integration is,” said Barrington Associates Managing Director Ed Bagdasarian. “What is the key asset? Often it’s the people who made that company successful.... We see the clash in culture being the No. 1 reason for failed transactions.”
San Jose-based EBay’s purchase of Skype is intended to propel the leading online auction site into new markets: namely, international e-commerce and Internet-phone services.
Skype, based in Luxembourg, was founded by Niklas Zennstrom and Janus Friis, the two technologists who created the Kazaa file-sharing program. Skype offers a free program that lets its 54 million registered users make voice calls from their computers. Its fee-based services, which let users call people on regular phones and use voice mail, generated $7 million last year. Revenue is expected to hit $60 million this year.
EBay Chief Executive Meg Whitman said she met Zennstrom at a conference in China in May, and the two quickly realized that their companies would fit together.
Whitman said adding an Internet calling service would help buyers and sellers work out details in those often-frenzied last minutes before an online auction closes. Plus, she said, buyers in countries where EBay is aggressively expanding, such as India and China, often want to haggle before agreeing to a sale, and Skype will help. Advertisers on EBay-owned classified services such as Rent.com also may be willing to pay extra for online phone calls.
Analysts expressed mixed views on the deal. EBay shares rose just 32 cents to $38.94.
Martin Pyykkonen, an analyst at Hoefer & Arnett, questioned why EBay, which generated $3.3 billion in revenue last year, paid so much for such a comparatively small company. He said the deal suggested that EBay expected “some slowdown in the core online auction market,” which had happened during the last year before the company returned to faster growth during the second quarter.
Whitman disputed Pyykkonen’s characterization, saying EBay was buying “from a position of strength.”
Scott Wendelin, chief executive of Prospect Financial Advisors, an investment bank in Los Angeles, said EBay and other global players were only going to get bigger.
“They can afford to dream $4-billion dreams,” Wendelin said.
Oracle, on the other hand, ponied up $5.85 billion in cash not for a chance at striking start-up gold in a new market, but to pull in an established competitor.
Oracle CEO Larry Ellison has made no secret of his ambitions to overtake Microsoft as the world’s largest software company. Oracle, IBM Corp., SAP and Microsoft are locked in a fierce battle to supply giant companies with databases, programs for tracking sales leads and other enterprise software.
Ellison has long predicted a consolidation among corporate software companies and pledged that his company would remain standing. With few big customers increasing their software spending by much, growth must come through persuading customers to switch vendors -- or through acquiring their vendor.
Oracle has completed seven deals this year, the most recent being its $10.3-billion acquisition of PeopleSoft Inc.
“In the [Silicon] Valley, Oracle’s arguably the most active in terms of buying,” said analyst Rob Enderle. “They want to get the top spot from Microsoft, and the only way to get there is through the acquisition path.”
Siebel represents the latest conquest for Redwood City, Calif.-based Oracle. Siebel’s shares gained $1.16 to $10.29. Oracle shares rose just 21 cents to $13.49.
San Mateo, Calif.-based Siebel’s primary product is its customer relationship management software, a market estimated by IDC to have been $8 billion last year. Such software helps track customer contact information and analyze how effective marketing campaigns have been, for example.
Some analysts expressed concern that Oracle’s rapid acquisitions may backfire.
“They’ve bought so many companies that they don’t have a lot of extra time integrating them into Oracle, much less innovate,” said Janet White of Info-Tech Research Group. “What could happen is that a lot of customers may not purchase Oracle because they’re not sure where those products are headed.”
