NetSuite’s material change of control – how did Oracle do?

Profile picture for user brianssommer By Brian Sommer May 2, 2018
Summary:
A bit more than a year after the acquisition closed, Brian Sommer gives his verdict on how Oracle handled NetSuite's material change of control

SuiteWorld18 Oracle NetSuite change of control by @philww

It’s been a wee bit more than a year since Oracle acquired NetSuite. An ownership change of this kind can often wreak havoc on the acquired firm and, equally important, on the acquired firm’s customers. So, how has NetSuite fared in this acquisition and what proof points were evident at last week’s SuiteWorld conference?

NetSuite’s change of control

In November 2016, Oracle Corporation acquired NetSuite for $9.6 billion. NetSuite was a publicly traded firm founded by Oracle alum Evan Goldberg. Evan launched NetSuite (née NetLedger) way back in 1998. It was a pure-play cloud solution then – and still is.

Oracle’s acquisition was interesting as Oracle’s founder, Larry Ellison, personally, was one of the largest investors in NetSuite. Forbes reported that Mr. Ellison owned over 41% of NetSuite’s stock. So, we had an Oracle investor/board member/executive leading the charge to acquire NetSuite. A colleague once described NetSuite to me thusly: “NetSuite is Larry’s other software company”.

Although there were some issues raised about this deal – also see this this WSJ article – it closed in early 2017. The newness of the deal was apparent at last year’s SuiteWorld event in April 2017. But, to Oracle’s credit, there weren’t a lot of Oracle executives present at that event. Mark Hurd was there though and he was quite clear that this new business unit of Oracle would remain fairly autonomous while still permitting NetSuite to take advantage of Oracle’s scale, global sales presence, capital, R&D and more.

Of course, as analysts, we’ve heard these kinds of pitches before and rarely have we seen the new owners honor these commitments. Did the pattern hold once more?

Why change of control matters

Material change of control issues should terrify many software buyers. After expending a lot of time and money selecting and implementing a new piece of software, the vendor you’ve chosen could get bought, fail, get new management, etc. All of those warm and fuzzy promises of ‘eternal partnership, love and mutual respect’ between your firm and the vendor can vaporize overnight.

In fact, if your firm was counting on specific new functionality to appear because it was listed in the acquired vendor’s product roadmap, well, don’t hold your breath. New owners seem to have an opinion on everything from product roadmaps, pricing, upgrade frequencies, which product lines to keep, etc.

Many times, the acquirer buys a software firm to get:

  • The subscription or maintenance fees – nothing else
  • New captive customers to cross-sell its doggy, ancient products to
  • Something new and shiny to peddle to its install base as the customers, after a decade of broken promises, is getting restless and could defect to another vendor

And, if the acquirer turns out to be a private equity firm, things could get pretty dire. They could strip the firm to the bone, shed much of the back office, customer support and marketing functions, all while tarting up the balance sheet for a quick sale. Many PE firms are run by financial engineers not software people. Oh, and after collecting all of their management fees for engineering this mess, watch them saddle the vendor with a mega-mountain of debt that must be serviced.

Some deals are more positive. Smaller vendors often get acquired as tuck-in deals. The larger firm will embed the solution in with theirs. However, sometimes these deals turn into a people grab as the original product gets totally rewritten to work with the acquirer’s solution and the people redeployed to more strategic projects.

I covered this subject in another diginomica piece last year. There’s a lot of sober advice in that article.

The Oracle-NetSuite deal

Oracle’s had a lot of practice acquiring software vendors over the years. Along the way, they’ve certainly learned a lot of best practices. In many deals, I’ve seen Oracle identify the best people in both firms and redeploy them shortly after the deal is approved. I’ve also seen them use the time between the deal’s announcement and its closure to figure out how it will cross-sell the acquired products and compensate their sales force for doing so. They’re also good at figuring out how to standardize/normalize contracts, employment practices, etc.

Yes, they have a well-oiled methodology for these things.

What was interesting in this deal is that so many of the principals had so much contact with each other over the last few decades. This deal felt more like a couple that has been ‘dating/living together’ for a decade and is now, finally getting married. As mentioned previously, Evan was close to Larry Ellison. NetSuite used all kinds of Oracle technology – for example, Oracle RDBMS – in its solution set. The chumminess was frequently mentioned at NetSuite user conferences.

NetSuite was somewhat of a testbed of innovation for Larry and Oracle. NetSuite had an extensible platform (NS-BOS) when the only other vendor with one was Salesforce. NetSuite did a lot of pioneering on multi-tenancy, something that Oracle only implemented in recent years.

When the deal went down, NetSuite’s organic growth, while solid, was somewhat limited as a company of its size, capital structure, etc, can only grow so fast without imploding. NetSuite’s international focus was nothing like its domestic US market penetration. And, while it had footholds in many countries it just wasn’t the big dog in many global markets (yet).

So, here comes Oracle. Say what you like but Oracle does have feet in the street and can sell. They’ve got sales and marketing personnel all over the world. They’ve got real offices and data centers everywhere, too. They also have the capital to fuel NetSuite’s growth.

On paper, this deal looked like it had potential. Oracle needed more cloud revenues and wanted something to bolster its SMB mid-market solution set. NetSuite could leverage a lot of Oracle’s resources, too.

With all of these apparent synergies, then how could this deal go awry and did it?

Sins of other M&A deals

While I mentioned that Oracle really knows how to do acquisitions, its batting record isn’t always perfect especially if the target company is a hostile takeover candidate. The Oracle acquisition of PeopleSoft/JDEdwards was one acrimonious deal. Users and the Department of Justice objected although Oracle eventually prevailed.

That takeover prompted many things. For one, it triggered Oracle to announce Apps Unlimited – essentially a policy to continue to provide support for old products forever. It also got so personal that one firm’s CEO threatened to shoot the dog owned by the other firm’s CEO. In the end, that deal did close.

The NetSuite/Oracle deal had none of that drama. (Note: I would have won a Pulitzer if it did).

But other non-Oracle software M&A deals have left many analysts and software customers leery. Specifically, some deals have triggered:

  • Forced conversions of the acquired customers to the new owner’s product line.
  • Destruction of the culture within the acquired firm – for example, when the suits come in, the foosball tables go out.
  • Wholesale decimation of the workforce with none of the back office, marketing or product management left.
  • All-new product roadmaps that delay or indefinitely postpone many expected new features.
  • Large numbers of top developers leaving as they like working for small, hip firms and not be employee 19,206 in a big tech conglomerate.
  • A revolving door of account executives that change with every season.
  • Asset stripping by the new owners.
  • Super high debt whose carrying cost precludes any spending on R&D.
  • Major price hikes with no corresponding increase in functionality, service or value.
  • And many more adverse impacts!

When Oracle acquired NetSuite, I’m sure a lot of customers and NetSuite employees were holding their breath to see what would happen.

R&D – a big beneficiary

NetSuite now states that it has spent north of a cumulative $1 billion on R&D for its product lines. The product road maps they shared with customers and analysts show them continuing to invest in specific verticals – for example, their long-running commitment to e-commerce – horizontal apps such as Tax Suite and in infrastructure.

NetSuite is transitioning out of its own data centers and will utilize Oracle cloud centers globally. They’ll also use Oracle’s newest database, container and other capabilities – check with NetSuite for exact availability. Even a new multi-tenancy capability of Oracle’s is getting a look-see from NetSuite.

On the functionality side, NetSuite’s tightened its Taleo connections up a lot. We were shown a lot of real-time, cloud-to-cloud connections with Taleo’s Recruiting technology and NetSuite’s SuitePeople HR product.

Other Oracle capabilities, like blockchain and AI, may get used by NetSuite because as one top NetSuite executive explained “it’s free”.

This access to Oracle’s technology and R&D efforts may either be the best or second best after-effect of this deal.

Capital and global expansion

Many years ago, a software CEO once told me that it cost his firm at least $30 million to open an office in another country. I think the price tag has increased since then.

I tell you this as you can’t underestimate how much capital investment Oracle has put into building its sales and delivery network globally. Oracle has sales offices in most major countries. They’ve got scores of local, in-country executives with deep knowledge of their country markets and the executives within many of the companies there.

NetSuite just couldn’t jump into all of these markets as it still had work to do to expand. It had to train up local personnel on the product lines, complete any needed product localization and compliance requirements, and, convert collateral to local languages. Interestingly, Oracle had probably already done much of that for most of the countries that NetSuite wants to penetrate.

It was no surprise that in this last year NetSuite has already leveraged the Oracle infrastructure, local business contacts and localization knowledge. China, where NetSuite, pre-deal, had only a nominal presence, is now NetSuite’s fourth largest country-based market. It is expected to grow to become its second largest country market in 2019 – second only to the US.

NetSuite’s penetration in Mexico, Brazil and several other countries has really accelerated recently too. All of this is proof that NetSuite is leveraging the Oracle infrastructure.

Hiring was another proof point of co-ordination between Oracle and NetSuite. Oracle’s campus hiring was indicated as very strong and they made their program available to NetSuite. It apparently was a big success for NetSuite.

Pre-deal, NetSuite was often seen competing domestically with firms like Intacct (now part of Sage) yet now it’s angling to give Microsoft fits in the SMB space globally. It will be worth watching Sage to see if they can help Intacct be a big global player like Oracle did with NetSuite.

People and morale

A couple of times, it was pointed out that NetSuite EVP Jim McGeever, who is head of the NetSuite business unit, is the only NetSuite executive who regularly communicates with Mark Hurd or others at Oracle. Apparently, everyone else at NetSuite can stay focused on what they’ve always done.

Mark phoned in his keynote contribution this year and except for some of the Oracle marketing/communications folks helping out with event logistics, it was pretty much a NetSuite show this week.

Interference from one’s acquirers is hard to avoid in a lot of M&A deals. I recall one particularly painful post-acquisition user conference. As each acquired firm executive got up to speak, a ‘handler’ co-presenter from the acquirer was on stage with him/her. That had to be infuriating/humiliating for the old executive team.

Outside of NetSuite CEO Zach Nelson’s retirement with the close of the deal, I’m not aware of other significant defections.

Morale of customers still seems positive, too.

White hat or black hat?

Vendor behavior towards customers is often fluid but frequently toxic if it goes south. Many vendors like to do software deals on their paper and may have lots of embedded URLs in those documents. Other vendors are notorious for huge price increases when their customers’ subscriptions come up for renewal. And, some vendors have very aggressive audit groups who love to pounce on customers for big or really tiny infractions.

Vendors have a choice in how they want to be perceived in the market. If they’re still in growth mode, they’ll often take a less aggressive/adversarial posture with customers as they need customers for references, renewal income, etc. But once a vendor’s product line ages, the vendor moves into harvest mode. This is where they will try to wallet-frack every penny possible from a customer’s bank account.

I would hope that Oracle recognizes the growth potential in NetSuite market and keeps its auditors in check. Failure to do so could hurt the post-deal goodwill they’ve already gotten.

Conclusion – my take

SuiteWorld18 was a pleasant surprise.

  • It was relatively upbeat
  • You could see the R&D was still advancing post-deal
  • There also was a noticeable lack of executive turnover at NetSuite
  • We didn’t get any surprise or abrupt changes in product or market direction – Oracle hasn’t changed the NetSuite product game plan but it has clearly goosed NetSuite’s global advance

In short, I have to give it to both Oracle and NetSuite’s leadership teams for executing a very good M&A deal. It’s extremely rare for me to say so but I will in this situation. That said, my cynicism will be fully in place for other deals by other vendors. Why? The track record of so many other material change of control deals is so bad that I’d be a fool not to be skeptical.

For more diginomica coverage of SuiteWorld, please also read Phil Wainewright’s piece NetSuite brings machine intelligence to midmarket ERP  and Denis Pombriant’s piece NetSuite accelerates self.