Oracle builds cloud fortress with $9.3B NetSuite deal

Oracle is trying to add some rocket fuel in the high-stakes race to dominate cloud services — and it’s doing so with a very familiar partner.

The software giant will pay $9.3 billion (U.S.) in cash to acquire NetSuite, a cloud computing company co-founded by Oracle executive chairman Larry Ellison, its largest shareholder.

Oracle will pay $109 in cash per NetSuite share in the transaction, expected to close this year. NetSuite’s board has unanimously approved the deal, the company said.

Redwood Shores, Calif.-based Oracle has been attempting to make a rapid, costly pivot to cloud services as large rivals including Microsoft and Amazon — along with cloud-first companies such as Salesforce.com — make aggressive plays for corporate clients with cloud-based business offerings.

While cloud services revenue has been rising rapidly at Oracle, it hasn’t been able to offset the decline in software licence revenue, its biggest business, as companies shift more of their activities to Internet- or cloudbased applications.

In NetSuite, Oracle gets the company that became the first to offer a full suite of enterprise resource planning applications, said Ray Wang, principal analyst and founder at Constellation Research. It’s also buying a business with close ties to Oracle.

Located in San Mateo, Calif., NetSuite was co-founded in 1998 by current NetSuite chairman and chief technology officer Evan Goldberg and Ellison as NetLedger, a cloud accounting company.

Ellison, who stepped down as Oracle CEO two years ago, is now Oracle’s executive chairman. He and his family remain the largest shareholders of NetSuite, owning more than 45 per cent of outstanding shares as of March 31, according to filings with the Securities and Exchange Commission.

With NetSuite’s IPO in 2007, the company was valued at $2.1 billion. Though it’s not profitable, its market cap had increased to $7.4 billion this year.

Current NetSuite CEO Zach Nelson, who handled global marketing for Oracle from 1996 to 1998, has said he expects NetSuite to hit $1 billion in revenue for the first time.

“(Oracle and) Larry (Ellison) gets the cloud revenue he needs. NetSuite gets access to the full Oracle stack. Customers should not be aversely impacted,” Wang said.

If completed, Oracle’s purchase of NetSuite would be its largest deal since buying corporate software company PeopleSoft in 2005 for $10.3 billion. Even so, it may still not be enough. S&P Global Market Intelligence an- alyst Scott Kessler kept a “hold” recommendation on shares of Oracle, which “needed to be more aggressive with cloud software M&A, given its recent limited top-line growth and overall revenue contribution.”

Ellison’s ownership of both NetSuite and Oracle, in which he owns 27 per cent of outstanding shares, may also raise questions about whether shareholders in both companies are getting the best price.

The two firms did not directly address these issues but noted the final deal is subject to a condition that a majority of NetSuite’s outstanding shares not owned by NetSuite directors, or persons related to or affiliated with Ellison, vote for the deal. It also said a special committee of independent Oracle directors led the evaluation of the deal.