Erecting what Co-President Charles Phillips called "another major beachhead against SAP," Oracle Corp. today announced plans to acquire customer relationship management software vendor Siebel Systems Inc. for $5.85 million in cash and stock.
The long-anticipated deal creates a virtual dead heat race for CRM market share between Oracle and SAP. SAP in 2005 will pull in $1.73 billion in CRM revenues, a figure that represents 15% of the overall market, according to AMR Research (Boston). Oracle, by combining Siebel's 4,000 customers with its own CRM installed base and the products and customers it acquired at the end of last year from PeopleSoft and J.D. Edwards, will also have $1.73 billion in CRM revenues, AMR noted.
Oracle said it will pay $10.66 for each Siebel Systems share, a 17% premium over the value of Siebel shares just prior to the deal's disclosure. Oracle said Siebel shareholders may chose to receive either cash or Oracle stock, although the company said no more than 30% of Siebel's shares may be converted to Oracle stock. Oracle said it will repurchase the number of shares equal to the number of shares issued as part of the transaction.
The deal, which is expected to close early next year, according to Oracle, already has the approval of Siebel's board of directors and of chairman and co-founder Tom Siebel. Closure, however, will be subject to Siebel shareholder and regulatory approval.
The acquisition follows by just seven months the culmination of Oracle's lengthy and contentious campaign to take over rival Peoplesoft, the largest deal completed during its ongoing acquisition spree. In comparison, the Siebel acquisition to date has been a friendlier -- though not a shorter -- courtship.
"This is a discussion that has been going on for years," Siebel told reporters and analysts in a conference call following this morning's announcement of the deal. "This was a customer-driven event. The companies were encouraged to move together by customers and partners, particularly in the last couple of years," added Siebel, who once worked at Oracle and has not had kind things to say about his former employer since departing to found his namesake company 12 years ago.
Siebel added that the decision to sell to Oracle was, in large part, an acknowledgement that the market has shifted away from the kind of best-of-breed applications in which Siebel has specialized.
"There was a shift in market dynamics that has occurred over the past three-to-five years... ." said Siebel. "Now customers and partners are indicating that what they're looking for is an integrated family of applications that minimize cost structures going forward. It was that change in market dynamics that really drove this combination forward."
It has also driven Siebel's financial results down sharply over the past few quarters. In April, just a few months after turning the reins over to new CEO J. Michael Lawrie, Siebel surprised Wall Street by reporting a $4 million net loss. Lawrie, who was soon replaced by former Accenture Ltd. CEO George Shaheen, attributed the loss to poor sales execution and unexpected, seasonal shifts in demand. Siebel has continued to report losses and Shaheen, while promising to turn the company around, has declined to comment on rumors that Siebel was for sale.
The deal accelerates Oracle's growth-through-acquisition strategy which is based on CEO Larry Ellison's belief that the enterprise applications market will continue to consolidate and that only large vendors with broad, integrated product offerings will survive. Since the Peoplesoft deal, Oracle has bought several other companies, including retail software maker Retek Inc. and financial services industry software and services provider iFlex Solutions.
Ellison said Oracle will continue to make acquisitions but, he said, "You'll see us concentrating on key industries." Ellison said it's unlikely that Oracle will attempt another large acquisition soon.
Timing of the Siebel deal was, in part, dictated by the preceding PeopleSoft acquisition Ellison said. "We had to complete the integration of PeopleSoft," he said. "We needed a few successful quarters showing that they PeopleSoft integration was complete and had worked financially. We are now prepared to take on another major acquisition."
Ellison predicted that integration of Siebel into Oracle will take place more quickly and easily than did the PeopleSoft integration. For one thing, he said, Siebel -- unlike Peoplesoft -- is a friendly takeover. And, he said, Oracle knows much more about Siebel's product line and people.
Oracle will maintain a dedicated CRM sales force in addition to its current ERP sales force. Still, Oracle officials made it clear that the acquisition will result in layoffs. "We have a series off duplicative functions," said Oracle co-President and CEO Greg Maffei.
Maffei did not directly answer questions about how Oracle will deal with poison pill provisions adopted by Siebel's board, which include employee retention provisions.
The acquisition gives Oracle a much-needed boost in the CRM market. Prior to the Siebel deal, Oracle's CRM products line, which was ranked sixth in overall market share, accounted for only three percent of the market and was not growing in terms of revenue, according to AMR.
The Siebel deal -- on top of the PeopleSoft acquisition -- not only vaults Oracle into a market share leadership position with SAP, it significantly grows Oracle's customer base in key markets where Siebel was strong, including healthcare, financial services, public sector and pharmaceuticals.
The acquisition also will strengthen Oracle's post-sales service management product offering, said Bob Parker, vice president at Manufacturing Insights, a market research arm of International Data Corp. "There's a lot of activity in service management in manufacturing, particularly discrete," said Parker.
Ellison said Oracle will continue to support and extend the Oracle and PeopleSoft CRM products "for some time to come," in much the same way that the company has promised to provide continuing support for the current PeopleSoft and JD Edwards products. Ellison made it clear, however, that the Siebel suite will become Oracle's primary CRM product line and a major element of the company's Fusion initiative to combine Oracle's e-Business Suite with the PeopleSoft and JD Edward product lines by 2008.
"The Siebel products will be the centerpiece of our strategy going forward, but we will continue to support and enhance the Oracle and PeopleSoft CRM product," Ellison said.
Oracle will continue to invest in Siebel's OnDemand hosted CRM product offering, Ellison noted.
While Oracle officials would not say if the Siebel acquisition will delay the delivery of the combined Fusion product, Ellison did acknowledge that the addition of the Microsoft .NET-centric Siebel product line will complicate the migration to Fusion, which is being built around the Java environment. Ellison said Fusion will now be built on Java but will interoperate with .NET.
Observers said the Siebel deal increases the chances for delays. "[The Siebel deal] makes Oracle a stronger software company. The only bad news is there are more distractions [for Oracle]," said Jim Shepherd, a vice president at AMR.
The deal also raises several question marks for Oracle and Siebel customers and partners. Customers running Siebel for CRM and SAP for back office functions, in particular, will face "an interesting decision point," said Manufacturing Insights' Parker. He predicted that the acquisition will not prompt many SAP-Siebel customers to convert to Oracle for back office applications. Still, predicted Parker, owning Siebel may allow Oracle to fend off any incursion from database competitor IBM which, in recent years, had become an increasingly close Siebel partner.
Officials at SAP reacted to the news by saying, as it has after previous acquisitions by Oracle, that Oracle will now be focused on merging product lines, rather than on the needs of Siebel customers. "We see striking similarities to the PeopleSoft acquisition," said SAP spokesman William A. Wohl. "No one is talking about the Siebel customers today. Will they too fall victim and watch their solution environment get turned upside down?"
The chairman and chief executive of Infor, an applications provider that has acquired 16 companies in the past couple of years, said that he, too, saw similarities with Oracle's acquisition of PeopleSoft. "It's a horizontal acquisition, the financial dynamics are not dissimilar and they're targeting larger enterprises," said Jim Schaper.
Based on Oracle's track record in integrating the PeopleSoft organization into Oracle, Schaper said he expects Oracle to do a a good job absorbing Siebel. He also said that it is quite possible the acquisition will have a calming effect on Siebel customers.
Looking at the market overall, Schaper said the Siebel sale doesn't necessarily mean that the best of breed model for applications has become obsolete, Tom Siebel's opinion notwithstanding. "My own personal opinion is that there are markets, such as in the extended supply chain, where best of breed will not survive," Schaper said. "But it all depends on the market and how the customer base is segmented. Tier one accounts, in particular, have IT organizations that can manage best of breed."
Oracle customers, meanwhile, praised the Siebel deal while expressing some reservations caused by the ongoing consolidation of enterprise application software vendors. Dave Rudzinksky, CIO at Hologic Inc., a Bedford, MA maker of medical products for women's healthcare and a user of Oracle's e-Business Suite and CRM products, said the addition of the Siebel products to Fusion will give customers the best of both worlds, best-of-breed functionality in an integrated suite.
The ongoing, Oracle-led consolidation in the enterprise software space, however, is cause for concern, admitted Rudzinksky.
"The down side if Oracle and SAP have the market wrapped up is that they can drive pricing -- and that is a possibility that I hope we do not become angry about down the road," said Rudzinksky. With that in mind, Hologic has resisted becoming a 100% Oracle customer, using Agile for product lifecycle management.
While Ellison said Oracle's acquisition strategy will continue, AMR's Shepherd predicted Siebel may be Oracle's last broad, horizontal software company purchase. Shepherd said he would be surprised if, as rumored, Oracle acquired Manugistics.
"Siebel," said Shepherd "[has] the last attractive customer base."
Editor-in-Chief David R. Brousell and Online Editor Alan Alper contributed to this report.