NetSuite returns to the ancestral home as Oracle pays $9.3 billion for Larry Ellison's 'other' cloud company

Stuart Lauchlan Profile picture for user slauchlan July 27, 2016
Those Oracle buying NetSuite rumors have finally come true and it's costing the former $9.3 billion to beef up its cloud portfolio. Now come the tricky questions...

Welcome home NetSuite

Sometimes the most obvious rumors are the ones that just pay off in the end. I’ve lost track of the number of times people have asked me if I thought Oracle would one day acquire NetSuite. It’s scuttlebutt that persisted due to the presence of Oracle CEO Larry Ellison and his family as NetSuite’s biggest shareholders.

I’ve always thought it made a kind of sense, but that it would tricky to pull off simply because of that Ellison stake. Well, we’re about to see how that plays out, as today Oracle has announced a $9.3 billion takeover of NetSuite which, subject to regulatory and shareholder approvals, will close later this year.

The $109 a share offer represents a near 30% premium to NetSuite’s closing price on Tuesday. It’s less than the PeopleSoft takeover at $10.3 billion back in 2004, but more than the $7.4 billion purchase of Sun Microsystems in 2009.

After the takeover announcement was made, NetSuite issued its second quarter numbers. Revenue in the second quarter rose 30% to $230.8 million, on losses that grew to $37.7 million from $32.3 million in the year-ago period. Today’s scheduled NetSuite results conference call has been cancelled.

The ties between the two companies are long-standing. While Ellison was roundly critcised for being late to adapt to the cloud computing model - “it’s just water vapor” etc etc - in reality he bankrolled the creation of NetSuite under former Oracle staffer Evan Goldberg, staking a claim to being one of the first external backers of a cloud apps firm.

That has led to a number of precautionary statements from Oracle today, mindful presumably of opportunistic legal challenges to the transaction. The firm states:

The evaluation and negotiation of the transaction was led by a Special Committee of Oracle’s Board of Directors consisting solely of independent directors. The Special Committee unanimously approved the transaction on behalf of Oracle and its Board of Directors.

In other words, Larry had nothing to do with this personally. It goes on to state:

The closing is subject to a condition that a majority of NetSuite’s outstanding shares not owned by executive officers or directors of NetSuite, or persons affiliated with Larry Ellison, his family members and any affiliated entities, be tendered in the tender offer.

Coming home

So after 18 years, why is NetSuite returning to ‘the mothership’?

According to an FAQ document on the Oracle website:

NetSuite’s customers have been early adopters of the cloud and represent potential current and future buyers of Oracle’s entire portfolio of technologies. Oracle intends to utilize its broad footprint of complementary and leading cloud SaaS, PaaS, IaaS and DaaS capabilities to help NetSuite’s customers grow their businesses faster and more profitably.

Beyond that, the devil will be in the detail. At present, there are huge unanswered questions:

  • Will NetSuite be allowed to run as an independent unit or be folded into Oracle?
  • Is there a reasonable role for NetSuite CEO Zach Nelson within Oracle if it does become part of the larger firm?
  • What are the pricing model implications for both firms?
  • And how is SAP going to feel about those two-tier ERP implementations now becoming Oracle-owned?

There will be one or two red faces on Wall Street today. For example, Cowen & Co’s Derrick Wood cited “litigation risks, product overlap and valuations” as reasons why the takeover speculation was unlikely to be correct:

We continue to think that an ORCL/N transaction has a high degree of litigation risk for Larry Ellison, as experienced with the acquisition of Pillar Data Systems. This could be especially true if ORCL were to pay the multiple now required to purchase N, which would be higher than ORCL’s historic transactions.

Wood went on to raise the notion of Salesforce as a possible NetSuite acquirer:

It’s possible that there could be another buyer outside of ORCL. However, we think that the potential list of acquirers is very small, with Salesforce (CRM) being the only logical strategic fit. But we suspect N’s largest shareholder, Larry Ellison, would be apprehensive to approve such a sale to a key ORCL competitor.

Well, we all make mistakes.

My take

So, it happened. If you speculate about something for long enough, there’s a fair enough chance that it eventually will come true.

At the moment, all we really have are the bare facts and some supportive PR statements. With the inevitable cancellation of the NetSuite con call, we just need to wait for more detail.

Oracle CEO Mark Hurd insists:

Oracle and NetSuite cloud applications are complementary, and will co-exist in the marketplace forever.

We shall see how that pans out in practice. For now, there are lots of questions and not a lot of information.

On a personal note, NetSuite was the very first SaaS company I covered as a journalist, back when it was still called NetLedger. It’s been a long journey to here. The next phase is clearly about to begin. I’m as curious as any customer will be to find out what form that takes.

We’ll update this story as and when more information becomes available.

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