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

Oracle isn’t alone

SAP AG (ADR) (NYSE:SAP) and International Business Machines Corp. (NYSE:IBM) have both been fierce rivals of Oracle in the SaaS arena. SAP, known in the industry as a consistent over-payer, bought Business Objects in 2007 for an astronomical sum of $6.8 billion, Sybase in 2010 for $5.8 billion, SuccessFactors in 2011 for $3.4 billion, and Ariba in 2012 for $4.3 billion. All in all, SAP has forked out a staggering amount of $20.3 billion on SaaS acquisitions over the past five years. That’s an average of about $4 billion year on M&A alone. And IBM has had its share of acquisitions too, though on a much smaller scale than that of Oracle Corporation (NASDAQ:ORCL) and SAP. In 2011, it bought DemandTec for $0.44 billion. And in 2012, it paid $1.4 billion to purchase Kenexa Technologies.

As a result of IBM’s transition to software, gross profit increased from 46.9% in 2011 to 48.1% last year. Net profit margins also improved last year, from 14.8% to 15.9%. This improvement in margins gave a strong boost to IBM’s cash flow generation. It now consistently generates more than $15 billion a year in free cash flow. This strong cash flow will leave IBM with lots of powder on its hands to seek further acquisitions in the SaaS sector.

My Foolish takeaway

Always pay attention to the trail of M&A actions that companies leave behind. It’s an indisputable fact that something is indeed going on, and that some transition is underway. In Oracle Corporation (NASDAQ:ORCL)‘s case, it’s a story of a company which consistently denied having anything to do with SaaS, to a company that now wants to become the world leader in that very field.

The article Oracle and SaaS – What’s Going On There? originally appeared on Fool.com and is written by Shmulik Karpf.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. and Oracle. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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