Wednesday, May 16, 2007

Oracle and Agile a Natural Combination; Where is SAP?

Last night Oracle announced that it has reached agreement to acquire Agile Software for $8.10 per share or approximately $495 million in cash. The deal is expected to close in the second half of July.

The consolidation in the product lifecycle management space has been going on for a while now with Dassault’s acquisition of MatrixOne more than a year ago, and more recently Siemen’s acquisition of Unigraphics. Agile has been an obvious target for sometime given its continuing losses and its stop and go progress on the top line.

The fit with Oracle is pretty straightforward, given that Agile’s software has been built on Oracle’s infrastructure. Moreover, the attractiveness of Agile to Oracle is obvious as part of Oracle’s strategy to surround SAP. The deal will enhance Oracle’s position in the manufacturing sector and more specifically in the high technology and consumer packaged goods verticals. In addition, there is little question that where Agile has struggled to expand beyond its core markets, Oracle’s dramatically greater scale and industry presence should enable Agile to finally fulfill these long standing ambitions.

Agile’s product will become the core of Oracle’s PLM offering. As investors well know the PLM space has been long touted as one of the more strategic, compelling and high growth sectors within the enterprise software space, and yet all of the specialized vendors in this space have struggled to produce the expected growth.

The valuation of Agile with an enterprise value of approximately 2.2x trailing twelve month revenues and 5.2x trailing maintenance revenues is toward the lower end of the range, relative to the valuations for MatrixOne and UGS. However in each of those cases it could be argued that the deal was more strategic to the acquirer. Another point to consider is that despite the prospect of a couple of other companies as possible buyers, notably SAP, IBM and Parametric, we strongly suspect that none of these companies expressed serious interest. While we can understand Parametric being somewhat conservative in this case, moreover although IBM has been an active acquirer of software companies they continue to avoid buying applications vendors, one has to wonder what SAP is thinking. The recent Wall Street Journal article “German Company’s Plan to Globalize Hits Cultural Barriers” Friday, May 11, 2007 did an excellent job summarizing the company’s cultural challenges, which we believe represent a major distraction.

Separately and for what it’s worth, our checks on Oracle’s business momentum for the all important May quarter have been to date quite positive with broad based reports that the field is executing well.

Another important takeaway from last night's announcement is that the continuing consolidation of the enterprise software market is far from over.

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