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The largest database and enterprise software company, Oracle Corp. (ORCL - Analyst Report) announced the acquisition of Passlogix Inc., a leading provider of enterprise single sign-on (ESSO) software based in New York.

Financial details of the transaction were not divulged but the deal is expected to close this year.

Passlogix products allow organizations to develop, improve and simplify security by enabling single sign-on (SSO) for a wide range of applications including client-server, mainframe and web-based applications.

Under the terms of the deal, Oracle will add Passlogix enterprise single sign-on and network authentication capabilities to its Identity Management Suite. This integration will provide enterprises with a complete identity management solution to advance their identity management, compliance and authentication initiatives with even tighter integration capabilities.

Passlogix products have been selected by a number of companies across multiple industries, including Communications, Financial Services, Government, Healthcare and Retail.

We believe adding business security feature from Passlogix to its own to software suit will help Oracle gain additional revenues and expand its security service business.

Oracle has spent more than $40 billion in acquisitions to broaden its customer base in various verticals. Oracle remains considerably active on the acquisition front and chooses targets that can be integrated within existing or new product lines. From time to time, the company also acquires organizations with competing technologies to eradicate rival products.

Oracle has grown its business principally through acquisitions; however, this has been eating up its balance sheet in the form of a high level of goodwill and intangible assets, totaling $30.0 billion or 48.2% of total assets as of August 2010. Moreover, increased acquisitions distract management’s focus on core activities, thereby limiting organic growth. It also makes comparisons more difficult.

Recommendation

Oracle’s acquisition of Sun Microsystems (in January 2010) will provide an impetus for growth in fiscal 2011 and beyond with increased accretive synergies strengthening its competitive position. If successful, Oracle’s new strategies would lead to higher top- and bottom-line growth, with increased traction from the combined product portfolio.

We are positive on Oracle’s longer-term growth prospects, given its growing market share, new product pipeline, cost savings initiatives and robust free cash flow. We expect 2011 results to be strongly aided by the Sun acquisition. Despite the positive Consensus sentiments, we remain cautious near term, given the expected integration related issues and slower-than-expected IT spending.

Although we remain incrementally positive on the stock, we maintain our long-term Neutral rating at this time since positives have already been priced into the shares, leaving little room for above-market gains. Currently, the stock carries a short-term Zacks #2 Rank ('Buy').

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