Oracle to Acquire RightNow

Oracle Corp. (NasdaqGS: ORCL - News) recently announced its decision to acquire customer relationship management software provider, RightNow Technologies Inc (NasdaqGS: RNOW - News). This marks the company’s third acquisition in the past month and the largest after the acquisition of Sun Microsystems in January 2010. The acquisition is expected to close by early 2012.

Oracle will have to pay $1.43 billion in cash, or $43 per share, which is approximately 20.0% of RightNow’s closing price of $35.96, as of October 21, 2011. According to Bloomberg, the acquisition values RightNow at 68 times EBITDA, the highest multiple for similar deals over the past five years. On a price/sales basis, the acquisition is valued at approximately 7.7 times of RightNow’s 2010 sales of $185.5 million.

RightNow's primary product helps companies manage customers' questions and complaints. RightNow’s suite of applications includes multi-channel service, sales, marketing, customer feedback management, voice automation and analytics.

RightNow is a premier Software-as-a-Service (SaaS) provider with more than 2000 customers. SaaS is a software delivery method that enables data access from any device with an Internet connection and web browser. In this web-based model, software vendors host and maintain servers, databases and codes that constitute an application. This is a significant departure from the on-premise software delivery model.

SaaS has gained immense importance in recent times due to the increasing adoption of cloud computing. According to market research firm Gartner, sales of online software, which touched $10 billion in 2010, is expected to more than double to $21.3 billion in 2015, much faster than traditional software. Customer Relationship Management (CRM) continues to be the largest market for SaaS, with revenues estimated to reach $3.8 billion in 2011, up from $3.2 billion in 2010.

We believe the acquisition reflects Oracle’s continued focus on improving its cloud computing infrastructure. Recently, Oracle launched its public cloud, which delivers software online via cloud computing. The addition of RightNow is expected to boost Oracle’s CRM initiatives and counter stiff competition from Salesforce.Com (NYSE: CRM - News). Oracle will likely integrate RightNow's software into its own portfolio of online offerings, which include programs for managing sales and marketing and human resources.

Our Take

Oracle remains very active on the acquisition front and generally targets companies that can be integrated within its existing or new product lines. From time to time, the company also acquires organizations with competing technologies with the intention of eliminating rival products.

In the last ten years, Oracle has spent more than $40.0 billion to buy 80 companies, including big names such as PeopleSoft Inc. and Sun Microsystems. In July 2011, Oracle acquired privately-held InQuira, a developer of service knowledge management software. Most recently, the company acquired Endeca Technologies, a leading provider of unstructured data management, web commerce and business intelligence solutions for $1.0 billion.

We believe that acquisitions in the field of data management and cloud computing will be beneficial for Oracle over the long term. We believe that Oracle’s strong product pipeline, rapid adoption of Exadata and Exalogic, and solid growth in the software business will drive incremental top-line growth going forward.

However, Oracle faces significant integration risks due to the rapid pace of acquisitions within a short span of time, in our view. We also note that Oracle is a late entrant in the field of cloud computing compared to some of its more illustrious peers such as Salesforce.com and Microsoft Corp. (NasdaqGS: MSFT - News) and hence may be expected to face tough competition.

Moreover, stiff competition from International Business Machines Corp. (NYSE: IBM - News), SAP AG (NYSE: SAP - News), Hewlett-Packard Co. (NYSE: HPQ - News), Dell Inc. (NasdaqGS: DELL - News) and Cisco Inc. (NasdaqGS: CSCO - News) in most of the markets is expected to hurt its profitability going forward.

We remain Neutral on a long term basis (6-12 months). Currently, Oracle has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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