Oracle: Larry Ellison's "Suite" Deal

NetSuite's Headquarters
NetSuite's Headquarters

Did you catch NetSuite's $75 million initial public offering filing? Maybe not, since it's a relatively tiny company, not profitable, and not looking to raise all that much. Ahh, but read the S-1 filingand you get a better sense of the drama playing underneath the paperwork. And that makes this a fun little story during an otherwise slow news week (with the July 4th holiday, post iPhone madness, etc.)

Turns out that a company called Tako Investments owns a 74% stake in NetSuite. Tako is one of the investment tools of Lawrence Investments. Lawrence Investments is the personal investment arm of Larry Ellison, Oracle's founder and CEO.

Oh, and Oracle happens to be in direct competition with NetSuite.

So, this is shaping up to be an interesting story, especially if NetSuite ever does anything meaningful in the marketplace. The background? Ellison poured nearly $100 million into NetSuite back in 1998 when it was founded by a group of former Oracle executives, just as another hosted software company from another former Oracle executive was getting started: has not had nearly the trajectory that Salesforce has enjoyed, but it has continued to putter along, generating just shy of $70 million in revenue last year, but racking up $200 million in total losses.

Bloggers are raising eyebrows and hackles, clamoring about the potential of a conflict of interest here with investors caught in the middle. Sanford C. Bernstein's Charles Di Bona tells me he doesn't see it that way. "He's been involved in this thing for quite some time, and to say that Larry Ellison shouldn't be a successful investor because he's the CEO of Oracle is a little bit of a double-standard. He made a good early stage investment. He's also made some bad ones that haven't done so well. Let's not forget there have been some other investments. No one has criticized him for having made missteps, so let's not penalize him when he makes a good investment. I just don't think that's fair," Di Bona tells me this morning.

So why is Ellison backing these guys? The question really is, why not? If you're in a position to play both ends of the field, why not? With NetSuite looking to sell a 10% stake in itself, and hoping to raise $75 million, that means the company values itself at $750 million. Ellison's stake in the company would then be valued at something north of $550 million. That's meaningful, even to a guy worth more than $21 billion.

The trouble is, what happens if NetSuite becomes a success? Ellison could find himself controlling a company in direct competition with his own. And what happens if NetSuite stumbles upon some neat algorhythm that becomes particularly attractive to Oracle's engineers? That might attract the attention of regulators if Ellison decides to double-dip by having Oracle acquire NetSuite? That would be an interesting development.

But an acquisition down the road is a big, BIG if.

"To the extent you bring this company public, if there ever were to be a transaction, it's got to be more clear because it's a publicly traded company. I think that's a net positive in terms of people's concerns about a conflict of interest to bring this thing public," says Di Bona.

In other words, bring NetSuite public and increase its transparency because of the regulatory filings. Otherwise, if Oracle ever does want to do a deal, and NetSuite wasn't public, that would leave Oracle investors wondering about the other side. This way, there's a lot more information for investors to ponder.

So that leaves investors wondering what to do? There's been discussion already that investors could get hurt, that they'll be caught in the middle of various interests, none of them their own, that they'll have no control over how the company is run, and no voting rights or influence to exercise for shareholder initiatives. But that really doesn't matter. Nothing is forcing investors to invest! And the ones who already have a pre-IPO stake have known of Ellison's involvement all along.

So, think of NetSuite more as a Class A and B kinda company, ala Dow Jones or Google. In NetSuite, there's Ellison (Class A) and everyone else (Class B); and if you trust his coattails, take the plunge. Otherwise tread lightly. Or don't tread at all. Investors know the details, the ownership, the potential conflicts up front. If they don't like what they're reading, they can keep their money in their wallets.

For Ellison, and the potential of a half-billion dollar paper-payday, the NetSuite IPO makes sense. Paper profits matter when you're keeping score like Ellison. For the rest of us, it's just paper.

Questions? Comments?