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Yesterday, Oracle Inc. (ORCL - Analyst Report) agreed to buy Taleo Corp. , a SaaS human resource software provider, for $1.9 billion or $46 per share.

Following this announcement, shares of Taleo were up nearly 17%, closing at $45.64, yesterday. Taleo has a clientele that spreads across 5000 organizations. Taleo’s Talent Management Cloud helps organizations to enhance human resource capabilities, improve performance and drive growth.

We believe that this acquisition is further evidence of Oracle’s continued focus on its cloud computing infrastructure. The acquisition is expected to expand Oracle's public cloud offering. The public cloud, which originally comprised existing products including fusion applications, expanded the company’s penetration into the SaaS application space.

Earlier, Oracle had locked horns with SAP AG (SAP - Analyst Report) for acquiring California-based cloud-computing software company SuccessFactors Inc. , a developer of software used by firms to evaluate employee performance. However, after losing out to SAP, Oracle was on the lookout for a similar buying opportunity in the SaaS space.

The Cloud Might Float Higher

SaaS has gained immense importance due to the increasing adoption of cloud computing. According to market research firm Gartner, sales of online software, which touched $10 billion in 2010, is expected to more than double to $21.3 billion in 2015, much faster than traditional software.

Moreover, according to research firm Forrester, cloud computing revenue is expected to increase from approximately $41.0 billion in 2011 to $241.0 billion in 2020. Meanwhile, Gartner projects revenue of $148.8 billion by 2014, higher than Forrester’s forecast of $118.7 billion for the same period.

In October 2011, Oracle acquired RightNow Technologies Inc, a premier Software-as-a-Service (SaaS) provider and a rival of SAP for $1.43 billion. The addition of RightNow also helped Oracle to target Salesforce.com Inc.’s (CRM - Analyst Report) service cloud offering, taking the competition between the two to the next level.

Our Take

Oracle remains very active on the acquisition front and generally targets companies that can be integrated within its existing or new product lines. From time to time, the company also acquires organizations with competing technologies with the intention of eliminating rival products. We believe that acquisitions in the field of data management and cloud computing will be beneficial for Oracle over the long term.

However, Oracle faces significant integration risks due to the rapid pace of acquisitions within a short span of time, in our view. We also note that Oracle is a late entrant in the field of cloud computing compared to peers Salesforce.com and Microsoft Corp. (MSFT - Analyst Report). Hence, it might face tough competition. Moreover, diminishing margins from its new software licenses and sluggish hardware sales are near-term headwinds.

We remain Neutral on a long term basis (6-12 months). Currently, Oracle has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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