Oracle's Larry Ellison makes biggest deal ever, but he's buying profit over growth
- Oracle's $28.3 billion purchase of Cerner is almost three times as rich as its next highest acquisition of $10.3 billion.
- The company had been relatively quiet on the M&A front while rivals Salesforce and Microsoft were doing their biggest deals ever.
- Oracle has $23 billion in cash and marketable securities as of the quarter ended Nov. 30.
In his 44 years running Oracle, Larry Ellison has never spent this kind of money. Not even close.
Oracle's announcement on Monday that it's buying medical software vendor Cerner for $28.3 billion is monumental for a company that was once viewed as the software industry's great consolidator.
On 15 occasions since 2005, Oracle has shelled out at least $1 billion for an acquisition. Seven of those topped $5 billion. In 2009, Oracle agreed to pay $7.4 billion for Sun Microsystems, opening its wallet for servers and storage networks to go beyond software and become what Ellison called an "integrated system" company.
But before this week Ellison had scored only a single deal in double-digit billions. That came in 2004, when Oracle bought PeopleSoft for $10.3 billion after a hostile battle that lasted 18 months.
In agreeing to buy Cerner for almost three times the price of PeopleSoft, Oracle is jumping into the modern era of M&A — one that is new to Ellison. Rivals have used their expanding market cap and swelling cash piles to buy growth or to get into a market that can keep them relevant as the world goes cloud, mobile, and is driven by data.
It's the first mega-deal for Oracle since the $9.3 billion purchase of cloud business management software vendor NetSuite in 2016. Ellison, Oracle's chairman, was NetSuite's biggest shareholder, with ownership of roughly 40% of the company at the time.
"Should this deal [with Cerner] be consummated, it could mark a return to Oracle's days of aggressive acquisition activity during which time the company very effectively rolled-up the legacy client-server application space," wrote analysts at Stifel, in a report late last week after news of a likely deal was reported. "What is different this time is that the sector is in the midst of strong secular growth driven by an architectural shift to the cloud."
This year alone, Salesforce closed its $27.1 billion purchase of Slack, and Square announced plans to buy Australian fintech company Afterpay for $29 billion. Microsoft said it's buying speech recognition software provider Nuance Communications for $16 billion, and Zoom agreed to buy contact center software company Five9 for $14.7 billion in stock. That deal was rejected by Five9 shareholders after a slide in Zoom's stock price made the combination unattractive.
Oracle's purchase of Cerner, assuming it gets approved by regulators and Cerner stockholders, will be up there with the largest software deals ever. The biggest came in 2019, when IBM closed its $34 billion purchase of Red Hat.
Cerner, which was founded in 1979, two years after Ellison created Oracle, is the second-largest provider of electronic medical records technology, behind Epic. Hospitals and medical facilities use the software so that doctors and staffers can share imaging data, patient reports and prescriptions in a secure way.
Oracle shares fell 5% after the deal was announced on Monday. At $95 a share, the purchase price amounts to a 20% premium over Cerner's closing price on Thursday, prior to news reports that the companies were in late-stage talks.
Cash deal is challenging
Despite Monday's slide, the transaction comes amid revived Wall Street optimism toward Oracle. On Dec. 10, after a better-than-expected earnings report, Oracle's stock shot up 16%, it second-best day in two decades. The shares are up 42% this year, double the gains in the S&P 500, and they reached a record last week.
But Oracle is paying cash for Cerner, rather than taking advantage of its stock appreciation. That's a hefty load for a company that reported $23 billion in cash and marketable securities at the end of the latest quarter, and typically generates about $12 billion a year in free cash flow. Oracle didn't say anything about how it would finance the $28.3 billion deal.
A person close to the matter said Oracle won't have to raise debt, considering the existing cash balance plus additional cash that will be generated by the time the deal closes. The person asked not to be named because the details are confidential.
Ellison may be going big, but he's staying far away from the kind of deals being pursued by Salesforce's Marc Benioff, who got his start working under Ellison at Oracle. Salesforce has spent almost $50 billion combined on Slack, Tableau and MuleSoft in the past three-plus years, prioritizing growth and new-market opportunities over profit, at least in the near term.
Cerner, like Oracle, is a slow-growth enterprise that throws off cash, the opposite of most modern subscription software businesses. Annual growth hasn't reached double figures since 2015, and sales shrank by 3.3% in 2020. Revenue is on pace to increase by about 5% in 2021, to an estimated $5.8 billion.
However, Cerner is expected to generate almost $1 billion in net income this year. Oracle CEO Safra Catz said in the press release that the acquisition will be "immediately accretive to" non-GAAP earnings in the first full year after closing "and contribute substantially more to earnings in the second fiscal year and thereafter."
One aspect of Cerner's business that's likely to be of particular interest to Ellison is the company's move to Amazon Web Services. In 2019, Cerner announced an initiative code-named "Project Apollo" that would run on AWS infrastructure and allow clients to access cloud technologies.
Oracle was a late entrant to the cloud-infrastructure business, and it trails AWS, Microsoft and Google in terms of market share. Far from conceding defeat, Ellison uses every opportunity to tout Oracle's cloud capabilities, occasionally at the expense of AWS.
There's every reason to believe that Ellison sees Oracle's cloud as the eventual home for a good chunk of Cerner's future migration.
The word "cloud" shows up 11 times in the deal press release, including in a quote from Oracle Executive Vice President Mike Sicilia, who said Oracle's technology "enables us to rapidly modernize Cerner's systems" in the move to the cloud.
Elsewhere in the release, Oracle says, "Cerner systems running on the Oracle Gen2 Cloud will be available 24 by 7 by 365," and the "goal is to deliver zero unplanned downtime in the medical environment."