Oracle’s (NASDAQ: ORCL) revenue run rate is about $60 billion a year. That compares to $100 billion for IBM (NYSE: IBM) and Hewlett-Packard (NYSE:HPQ). Oracle has advantages as it attempts to catch its two larger rivals. It has become a company which attracts Wall Street’s attention because of its powerful earnings successes. And, like Cisco (NASDAQ: CSCO), it has proved that its CEO Larry Ellison and his management are experts at integrating acquisitions
Ellison recently said he does not expect to grow the way that HP did. Oracle will not try to buy an IT services business like HP did when it purchased EDS. Ellison would rather buy companies that either are its component suppliers or firms that compete with those suppliers. He wants Oracle to become a more integrated operation that depends less on partner firms for its success.
“You’re going to see us buying chip companies,” Ellison, 66 said at Oracle’s annual meeting in San Francisco, according to Bloomberg. Hardware is in the process of becoming a legacy business at IBM and HP. Ellison who generally swims against the conventional wisdom in the enterprise IT business means to do that again.
There is something curious about Ellison’s plan. Hardware companies generally have lower margins than those in the software industry. And software sales often come with multi-year licenses and support contracts. These contracts account for a great deal of Oracle’s revenue, and its backlog of sales for the future.
Ellison started his hardware gamble with Oracle’s buyout of Sun Microsystems. The profits of that operation have been better than expected, but that may be due to the lower personnel costs following the layoff of about 1,000 workers.
Investors will question the wisdom of Ellison’s plan. Integration often prevents companies from buying components from suppliers that can be pressured into price concessions. Oracle is likely to cut off a portion of a valuable set of supply chains.
One of the most often mentioned buyout targets for Oracle is No.2 chip company AMD (NYSE: AMD) If Ellison moves in that direction, it will show that his plan is flawed. AMD has been a failure for nearly six years. That will not change with Oracle as its parent.
Douglas A. McIntyre
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