Oracle Corporation (ORCL) and SaaS – What’s Going On There?

It’s always a smart move to pay close attention to corporate actions such as mergers and acquisitions (M&A). That’s because giant tech companies sometimes go through various transition periods in the course of which they perform a major shift in their core business. Take International Business Machines Corp. (NYSE:IBM), for example.

Only a decade ago, “Big Blue” used to sell laptops and hardware. Through a chain of prolonged and complicated M&A transactions, the company has totally changed its business to become the number one IT business in the world. Turnarounds, like that of International Business Machines Corp. (NYSE:IBM), always leave some trail in the sand. A vigilant investor could  pick up on that by monitoring the trail that IBM has left during its M&A journey. I believe that Oracle Corporation (NASDAQ:ORCL) is now on the same type of journey, to compete head-to-head with SAP AG (ADR) (NYSE:SAP).

Oracle and SaaS – Not interested

Oracle Corporation (NASDAQ:ORCL) didn’t believe in the concept of software as a service (SaaS). On various occasions, the company’s chairman stated that customers are simply not interested in SaaS, and that Oracle Corporation (NASDAQ:ORCL) won’t go down that road. He gave two main reasons to justify his argument. First, SaaS is very database intensive. Normally, people do not want all their data resident on an on-demand product. Second, it seems that customers want to ‘own’ software. When it comes to software, they want to make a decision on ownership. They don’t want others to make it for them.

Oracle and SaaS – Very much interested

But words are very cheap. It’s actions that really matter. Oracle Corporation (NASDAQ:ORCL) has been very rigorous in pursuing target companies that would give it an edge in the Saas field. All you have to do is to take a careful look at Oracle Corporation (NASDAQ:ORCL)‘s M&A recent record. In the year 2011 alone, Oracle bought out Endeca, Art Technology, and RightNow for $1.1 billion, $1 billion, and $1.5 billion, respectively. That’s a total amount of $3.6 billion funneled into SaaS in 2011 alone. But it didn’t stop there.

Oracle kept on buying SaaS companies in 2012. The company bought Vitrue, Eloqua, and Taleo for $0.3 billion, $0.8 billion, and $1.9 billion, respectively. Here went another cool $3 billion for SaaS acquisitions. Let’s bring that into perspective. Oracle’s free cash flow from operations totaled $11.2 billion in 2011 and $13.7 billion in 2012. This means that Oracle forked out 32% of its cash from operations in 2011, and 22% of its cash from operations in 2012, on this SaaS acquisition spree. I believe that Oracle’s actions send out a very clear signal, regardless of what the company says or doesn’t say. Oracle wants to become the world leader in SaaS.

Oracle Corporation (NASDAQ:ORCL) and SAP AG (ADR) (NYSE:SAP) are two of the most successful business software companies in the world. In particular, Oracle has long been known as a category killer that ruthlessly runs smaller competitors out of business. It either kills them, or buys them out altogether. We have seen enough examples of that.