Oracle Set to Buy Vitrue

The competition for dominating the cloud-based software-as-a-service (SaaS) market is heating up as arch rivals Oracle (ORCL - Analyst Report) and SAP (SAP - Analyst Report) look to outdo each other on the acquisition front. Recently, SAP announced its intention to acquire business & commerce network company Ariba Inc. Almost at the same time Oracle announced its plans to buy Vitrue, a cloud-based social-marketing software developer.

Although Oracle did not provide any financial details of the transaction, the company is reportedly paying $300.0 million for the start-up, which has received more than $33.0 million in funding from venture capitalists including Scale Venture Partners and Advent Venture Partners to date.

Based in Atlanta, Vitrue offers solutions which marketers use to collect and collate social interaction data from Facebook (FB - Analyst Report), Youtube, Twitter, Google+ and many other social networking platforms. With the help of this data, marketers develop campaigns for the target audience which is eventually delivered across these social networks and devices. The company boasts a strong clientele that includes the likes of McDonald (MCD - Analyst Report) and Yahoo! (YHOO - Analyst Report).

We believe that the acquisition will boost Oracle’s customer relationship management (CRM) customer base going forward. The Vitrue acquisition will also help it to rapidly expand in the social marketing segment dominated by Buddy Media, Wildfire, Involver, ThisMoment, and many other small start-ups. Moreover, we believe that the acquisition will help Oracle to provide an end-to-end cloud CRM service over the long term.

Cloud Computing: Oracle & SAP Rivalry Continues

The latest acquisitions of both Oracle and SAP reflect cut-throat competition to gain the top-spot in the Cloud based SaaS market. SaaS is a software delivery method that enables data access from any device with an Internet connection and web browser. In this web-based model, software vendors host and maintain servers, databases and codes that constitute an application.

SaaS has gained immense importance in recent times due to the increasing adoption of cloud computing. Demand for SaaS-based products have been steadily on the rise for some time and is expected to increase greatly based on some inherent benefits associated with the platform.

Applications delivered over the SaaS platform not only allow enterprises to start using them instantly, but are also more cost effective, as compared to traditional products installed at a customer’s onsite data center.

Moreover, SaaS applications are more scalable and they can be continuously upgraded as compared to the traditional products. 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 by 2015, much faster than traditional software.

To gain an upper hand, both Oracle and SAP have been on acquisition sprees recently. Both acquired companies from different sectors, which they expected would not only expand their product portfolios but also provide a competitive edge. However, being a late entrant in the cloud computing market, Oracle has been the more aggressive of the two in recent times, in order to catch up.

Over the last 18 months, Oracle acquired a number of companies including small start-ups as well as big players from different fields (clinical trial to Data analytics) such as Taleo (human resource), RightNow (CRM), Endeca (unstructured data management, web commerce and business intelligence) to name a few. The latest acquisition of Vitrue is expected to help Oracle to solidify its position in the social marketing arena over the long term.

On the other hand, SAP acquired SuccessFactors, a leading cloud-based human capital management solutions provider to boost its competitive position. It also announced its intention to acquire Ariba.

We expect more acquisitions from these two companies that are likely to be easy to integrate along their respective product lines. However, we believe that it is very difficult to predict a clear winner among these two, considering the depths of their product portfolios and diversified customer base. We expect competition to intensify over the long term.

Recommendation

We believe that acquisitions in the field of data management and cloud computing will be beneficial for Oracle over the long term. We believe that Oracle’s strong product pipeline, rapid adoption of Exadata and Exalogic, and solid growth in the software business will drive incremental top-line growth going forward.

However, Oracle faces significant integration risks due to the rapid pace of acquisitions within a short span of time, in our view. Moreover, stiff competition in most of the markets is expected to hurt its profitability going forward.

We remain Neutral on a long term basis (6-12 months). Currently, Oracle has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.