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Oracle’s Larry Ellison chooses profit over growth in Cerner deal

Oracle President and CTO Larry Ellison delivers a keynote at the Oracle OpenWorld conference in San Francisco on October 22, 2018.

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In his 44 years as head of Oracle, Larry Ellison has never spent that kind of money. Not even close.

Oracle’s announcement on Monday that it is buying medical software provider Cerner for $28.3 billion is monumental for a company that was once considered the software industry’s great consolidator.

On 15 occasions since 2005, Oracle has paid at least $1 billion for an acquisition. Seven of them exceeded $5 billion. In 2009, Oracle agreed to pay $7.4 billion for Sun Microsystems, opening up its server and storage networking portfolio to go beyond software and become what Ellison called an “embedded systems” company.

But before this week, Ellison had made just one double-digit billion deal. It happened in 2004, when Oracle bought PeopleSoft for $10.3 billion after a hostile battle that lasted 18 months.

By agreeing to buy Cerner for nearly three times the price of PeopleSoft, Oracle jumps into the modern era of mergers and acquisitions – news for Ellison. Rivals have used their expanding market capitalization and cash stacks to buy growth or enter a market that can keep them relevant as the world shifts to cloud, mobile and data-driven.

It’s the first mega-deal for Oracle since the $9.3 billion purchase of the cloud-based business management software provider NetSuite in 2016. Ellison, chairman of Oracle, was NetSuite’s largest shareholder, owning around 40% of the company at the time.

“Should this agreement [with Cerner] be consummated, this could mark a return to the days of aggressive Oracle acquisition activity in which the company very effectively deployed the legacy client-server application space,” Stifel analysts wrote, in a report late last week after announcing a likely “What’s different this time is that the industry is growing secularly driven by an architectural shift to the cloud.”

This year alone, Salesforce completed its purchase of Slack for $27.1 billion and Square announced plans to buy Australian fintech company Afterpay for $29 billion. Microsoft said it was buying voice 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 drop in Zoom’s share price made the combination unattractive.

Oracle’s purchase of Cerner, assuming it is approved by regulators and Cerner shareholders, will rank among the largest software deals ever. The biggest came in 2019, when IBM completed its $34 billion purchase of Red Hat.

Cerner, which was founded in 1979, two years after Ellison founded Oracle, is the second largest provider of electronic medical records technology, behind Epic. Hospitals and medical facilities use the software so doctors and staff can share imaging data, patient reports, and prescriptions securely.

Oracle shares fell 5% after the deal was announced on Monday. At $95 a share, the purchase price is a 20% premium to Cerner’s closing price on Thursday, before reports that the companies were in late-stage talks.

Cash transaction is difficult

Despite Monday’s drop, the transaction comes amid renewed Wall Street optimism toward Oracle. On December 10, after a better-than-expected earnings report, Oracle the stock jumped 16%, the second best day in two decades. Stocks are up 42% this year, double the gains of the S&P 500, and hit a record high last week.

But Oracle is paying cash for Cerner, rather than enjoying its stock appreciation. That’s a heavy load for a company that declared $23 billion in cash and marketable securities at the end of last quarter, and typically generates around $12 billion a year in free cash flow. Oracle said nothing about how it would fund the $28.3 billion deal.

A person familiar with the matter said Oracle will not have to take on debt, given the existing cash balance and the additional cash that will be generated when the deal closes. The person asked not to be named as the details are confidential.

Ellison may be getting big, but he’s still a far cry from the kind of deals pursued by Salesforce’s Marc Benioff, who started working under Ellison at Oracle. Salesforce has spent nearly $50 billion combined on Slack, Tableau, and MuleSoft over the past three years, prioritizing growth and new market opportunities over profit, at least in the short term.

Marc Benioff, president and CEO of Salesforce.com, speaks during the grand opening ceremony of the Salesforce Tower in San Francisco on May 22, 2018.

David Paul Morris | Bloomberg | Getty Images

Cerner, like Oracle, is a slow-growing company that wastes money, unlike most modern subscription software companies. Annual growth hasn’t hit double digits since 2015, and sales fell 3.3% in 2020. Revenues are expected to grow about 5% in 2021, to about $5.8 billion.

However, Cerner is expected to generate nearly $1 billion in net revenue 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 will contribute significantly more to the company’s earnings. second exercise and the following ones”.

One aspect of Cerner’s business that may be of particular interest to Ellison is the company’s move to Amazon Web Services. In 2019, Cerner announced an initiative codenamed “Apollo Project” that would run on AWS infrastructure and allow customers to access cloud technologies.

Oracle is a latecomer to the cloud infrastructure market, and it lags behind AWS, Microsoft, and Google in terms of market share. Far from admitting defeat, Ellison takes every opportunity to tout Oracle’s cloud capabilities, sometimes to the detriment of AWS.

There’s every reason to believe that Ellison sees Oracle’s cloud as the eventual home for much of Cerner’s future migration.

The word “cloud” appears 11 times in the deal’s press release, including in a quote from Oracle’s Executive Vice President Mike Sicilia, who said Oracle’s technology “allows us to modernize quickly Cerner’s systems” in moving to the cloud.

Elsewhere in the release, Oracle states, “Cerner systems running on Oracle Gen2 Cloud will be available 24 hours a day, 7 days a week, 365 days a year”, and “the goal is to provide zero downtime unforeseen in the medical environment”.

LOOK: Oracle in talks to buy Cerner