Oracle hunts targets, investors wary

SAN FRANCISCO (Reuters) - As Oracle hunts for its next takeover target, some analysts warn the software maker should temper its spending spree to ease investor concern over a strategy that has held down the company's share price.

Oracle chief executive Larry Ellison has vowed to lead consolidation in what he argues is a maturing industry that requires a smaller number of players as customers rein in new business software spending.

The aggressive acquisition strategy is in marked contrast with that of market leader SAP of Germany which has elected to focus on winning new business rather than buying its competitors.

In the past two years Oracle has spent some US$19 billion buying up its rivals but so far investors remain far from convinced on the company's bid to lead the consolidation Ellison has said could be over in as soon as five years.

"I don't know whether the investment community has reconciled itself to the fact that the software industry is maturing," said Pat Walravens, an analyst at JMP Securities. "There is clearly a huge disconnect and investors are willing to pay a much bigger premium for organic growth," he said.

Oracle's stock has been more or less flat since the beginning of the year. Oracle also trades at 14 times Wall Street's 2006 consensus profit estimate, about half SAP's 25 times price-to-earnings ratio.

In the three years since Ellison declared the software's industry's high-growth era over, Oracle stock is down about 24 percent with SAP's performance flat over that time frame.

Charlie Di Bona, a Sanford C. Bernstein analyst, said Oracle now needs to temper its merger appetite, especially on large deals, and focus on retaining customers and key sales people as it integrates recent purchases.

While Di Bona sees no problems with smaller deals of a couple hundred million dollars that help boost Oracle's research and development resources, he said investors would likely punish Oracle's stock even further if it makes another big deal too soon.

"They have to convince people first and foremost that they have a stable business that generates cash," he said. "They need to start setting a tone (that) they are done with big acquisitions."

Oracle has spent about US$19 billion on deals it has closed in the past two years, including its recently completed US$10.6 billion hostile takeover of PeopleSoft.

In addition, it bid US$5.85 billion in September for Siebel Systems to gain a stronger foothold in the growing area of customer management software, which helps companies track and manage their sales forces.

The deals have helped Oracle boost its customer base and compete in industries where it did not have as strong a position.

They have also generated revenue as businesses keep a lid on new spending on software applications that help companies manage everything from human resources to accounting to their supply chains.

With about US$4.8 billion in cash and short-term investments before considering the yet-to-close Siebel deal, Oracle has the resources to keep muscling its way through the software industry.

The question, however, is who is left to buy.

BEA Systems is an oft-mentioned candidate, but Ellison recently said the company was no longer a formidable rival -- or an attractive takeover target.

Bruce Richardson of AMR Research said the industry was running out of big targets save for BEA Systems and predicted Oracle might go after business intelligence software vendors such as Cognos, Hyperion Solutions and Business Objects.

"We really haven't seen that market get dented," Richardson said. "That is the only market that is consistently growing."

He said Ellison's strategy was the right one because it is the only way to grow in the slowing market for business software that does everything from run a company's back-office functions to managing sales forces.

But whether the company slows its acquisition pace is anybody's guess, Richardson said, noting few people anticipated Oracle's bid for Siebel would come so soon after it closed the PeopleSoft deal.

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