For Oracle, the past few months have been one big shopping spree. On January 31, 2006, the enterprise software giant purchased longtime rival Siebel Systems, the leading provider of customer relationship management software. On February 14, it acquired Sleepycat, an “open source” database maker; two days later it bought HotSip AB, a Swedish telecommunications software company. Meanwhile, press reports suggest two more acquisitions will occur in the near future. 

For many companies, Oracle’s month would have been a year’s worth of merger and acquisition activity, but for the Redwood Shores, Calif.-based firm, it’s the norm. Oracle CEO Larry Ellison made a big splash in 2004 by announcing he would consolidate the software industry, starting with archrival PeopleSoft, and he has been true to his word. Since Oracle closed the PeopleSoft deal in January 2005, it has averaged more than an acquisition a month.

The company is viewed by analysts as the leading provider of database software, which allows customers to track everything from financial data to customer profiles. It has also expanded into enterprise applications that run human resources, accounting and supply chain management functions. While this software may not get the press of Apple’s iTunes or Microsoft’s latest operating system, applications from Oracle and its main rival SAP serve as the nervous system of corporate America.

Given the emerging dynamics of the software industry, Oracle’s acquisition spree isn’t that surprising, says Wharton operations and information management professor Morris Cohen. “It’s getting harder and harder to go back to customers and sell upgrades for applications. By building an infrastructure of interconnected applications, you can sell other things when the upgrades aren’t coming. This is really about building the customer base and then leveraging it.” In other words, Oracle is starting to behave more like an older company than a Silicon Valley upstart, as Ellison himself noted at a Credit Suisse investment conference in Santa Monica, Calif., on February 8.Oracle is a mature software company, and the way I think you look at a mature software company [is different than a startup],” he said. 

According to Wharton finance professor Vinay Nair, who has studied Oracle’s acquisition of PeopleSoft, mature companies sometimes have to go outside for opportunities. “Oracle is clearly looking externally for its growth. The company has determined that it will take too long to build up its infrastructure internally.” While it’s not clear yet how Oracle’s strategy will play out, Ellison and his team have so far dispelled a common view that technology mergers can’t work, says Nair.

Many analysts — including JMP Securities’ Patrick Walravens — say that Oracle has kept acquired customers happy by offering a broader product line and discounts. And by holding on to customers, Ellison has been able to gloat a little about his acquired properties. “Siebel made sense financially; PeopleSoft made sense financially. But [they] also made sense strategically. So we win twice,” said Ellison at the February 8 conference. “In fact, you can argue we win three times. It’s a good financial play; it’s a good strategic play in that we gain more heft and more scale in the apps business. We also get a larger opportunity to sell our middleware and database [software]. So, these acquisitions work out very well.”

The Battle for New Customers

While Ellison’s acquisitions seem to be paying off, “There’s no hard and fast rule about whether growing by acquisition is more risky,” says Nair. “Oracle’s strategy is just an alternate route to grow.” Its decision to acquire companies is most likely based on several factors, he adds. How hard will the integration be? What are the costs associated with it? What’s the rationale for the purchase? Acquisitions that are focused on cost savings are generally less risky than those purchases designed to grow revenue. Why? “You don’t control all the factors that go into revenue synergies,” says Nair, adding that the ability to increase revenue largely depends on customer perceptions.

That’s why it’s too early to call Oracle’s strategy a success. The PeopleSoft acquisition looks smart now because it is not easy to switch enterprise software once it’s installed. SAP has taken a more conservative approach to acquisitions and has marketed itself as a more stable alternative to Oracle. To Nair, the real battlefield between SAP and Oracle will be for new customers. “Perhaps new customers will go to SAP,” causing Oracle to “lose some part of the new customer market.” While Oracle is increasing its existing customer base through acquisition, SAP is trying to increase market share with internal growth, he adds.

Indeed, grabbing more customers is one of the key reasons for Oracle’s acquisition of Siebel Systems. “Siebel has a large installed services and support organization,” says Thomas Y. Lee, Wharton professor of operations and information management. “And if Oracle acquires enough customers, its business model of the future may begin to look something like IBM’s. One part of IBM develops its own database-based software tools but it also has a global services unit that is largely agnostic regarding competing software platforms.”

By acquiring multiple companies, Oracle can offer big corporate customers more choice, says Lee. “Because of Oracle’s acquisitions, the customer now gets the simplicity of a single vendor with the benefits of a larger menu of software options.” 

The Open Source Market

One question for Oracle is, at what point does its spate of mergers start delivering diminishing returns? Cohen says there is no reason why Oracle can’t continue to acquire companies. “As long as you can find things to add to your product line — and with customers reluctant to buy from multiple vendors and demanding one throat to choke — why stop?” Nair suggests that, for now, Oracle is betting that the advantages of growing by acquisition are greater than the integration risks. “As long as the synergies outweigh the premium paid, it makes sense. What it will really come down to is how disciplined management is. If the acquisition doesn’t add up, can Oracle just walk away?”

So far, Oracle seems willing to spread its tentacles into as many markets as possible. Its latest acquisition of Sleepycat software entrenched it more into the open source database market, which in theory could erode the market share of Oracle’s main database product. Walravens says Oracle bought Sleepycat largely to reconcile different business models based on selling licenses to proprietary software versus pitching services around free applications. If Oracle can learn multiple business models, it should be able to find many ways to sell its software, he adds.  

Wharton legal studies and business ethics professor Dan Hunter agrees. The Sleepycat deal allows Oracle to participate in the open source community — essentially a group of developers that create software for free — and ultimately find a way to profit from it. “Oracle’s databases are proprietary, but (the company) still needs to understand open source” just in case free software distribution emerges as the dominant business model, says Hunter.

While Oracle’s entrance into the open source database market may not make sense on the surface, the company will learn how to operate with developers that build applications for free. And it has already taken a step in this direction by offering an entry-level version of its own database for free. The end game: Make sure Oracle’s databases can mesh well with all alternatives and applications. “Oracle needs to get in because, in the end, the database becomes a commodity,” Hunter notes.

It makes sense, Lee agrees, to offer an open source version of Oracle that competes with open source database rivals such as MySQL and Ingres. In addition, Oracle can better integrate its applications with open source code, meaning customers have another option to stay with the company. “For example, a Siebel customer could still use its CRM system, whether it’s with an Oracle database or an open source one.” 

Fusing Acquisitions Together

One of Oracle’s bigger tests, Lee adds, will be connecting its acquired product lines together into one coherent software suite. The company has shown it can keep customers by offering them lifetime support on applications they currently run. The biggest issue will be what happens when these customers have to upgrade. Will they turn to SAP or view Oracle as a long-term software provider? “The biggest challenge will be the post-sale services and building long-term relationships,” says Lee. “Oracle will also have to manage the expenses related to merging the code bases.”

Ellison and company have an answer to Lee’s concerns called Fusion, a series of applications that will be the bridge between Oracle’s old and newly acquired software. Oracle has begun developing Fusion software and is targeting 2008 as the year when its acquired software will be merged together. Cohen says the biggest risk to Oracle’s strategy is how Oracle combines its acquired products. “At some point, you have to stop merging applications and rewrite them.” 

Meantime, Kendall Whitehouse, senior director of advanced technology development at Wharton, says Oracle will have to work to combine the acquired workforces into one culture to be successful in the long run. So far, Oracle has laid off employees equally from acquired companies and its own employees.

Nevertheless, Whitehouse says that the successful technology acquisitions tend to keep executives — and their management skills — from acquired companies. For instance, Adobe Systems has given Macromedia executives a number of high-level positions as the companies merged products and business functions. Microsoft acquired Groove Networks and named company founder Ray Ozzie, who created Lotus Notes, as chief technology officer.

Despite Oracle’s acquisitions, Whitehouse notes that there are few executives who would be considered logical successors to Ellison. In fact, two of Oracle’s acquisitions — Siebel and PeopleSoft — were run by former Ellison adversaries, Thomas Siebel and Craig Conway, respectively. “Look at how Adobe restructured after the Macromedia purchase,” says Whitehouse. “The products dovetailed nicely and many important positions were filled by Macromedia people. It’s about much more than just acquiring customers.”