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Oracle, Salesforce Team Up

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In a major strategy reversal Oracle Corp. (ORCL - Free Report) is teaming up with (CRM - Free Report) , its fierce competitor in the cloud-based customer relationship software market. This is Oracle’s second successive high-profile deal within a short span of time, after it announced an alliance with long time foe Microsoft (MSFT - Free Report) on Jun 24.

The Oracle-Salersforce partnership spans over a nine-year period and covers every aspect of cloud computing. Under the terms of the deal, Salesforce software will run on Oracle’s Linux (previously Salesforce used Red Hat Linux) and its cloud based applications will support Exadata hardware.

Oracle entered the hardware market through the acquisition of Sun in 2010. However, the hardware business failed to achieve significant traction and has been a drag on top-line growth over the last couple of years. Oracle expects hardware growth to rebound in the upcoming first quarter of 2014.

We believe that Salesforce’s endorsement of Oracle’s engineered systems (Exadata, Exalogic, Exalytics) is a much needed boost to Oracle’s hardware segment in terms of revenues as well as customer expansion going forward. In the past, Salesforce has used Dell hardware.

The partnership is also expected to ensure tighter integration between Oracle and Salesforce clouds, which will help customers to easily move their data between the two platforms. Salesforce also agreed to use Oracle’s cloud-based human resources and financial applications. However, the deal did not specify any details about Salesforce’s involvement with Oracle’s new cloud-based database 12C platform.

We believe that the partnership is mutually beneficial for both the companies going forward. However, the deal will particularly help Oracle, as it not only removes a significant competitor but also creates a cross-functional sales opportunity over the long term.

Salesforce is regarded as one of the pioneers of the cloud-computing model, while Oracle has been a late-entrant in this field. Although Oracle aggressively tried to gain market share through several acquisitions (Taleo, RightNow, Endeca Vitrue, etc), stiff competition hampered its progress.

In such a scenario, the partnerships with Salesforce and Microsoft are expected to provide a significant boost to Oracle’s cloud-computing endeavors. We believe that the deals significantly add to Oracle’s competitive strength against established players such as SAP and (AMZN - Free Report) as well as against new entrants such as Workday, VMware and Google.

However, we believe that the synergies from the partnerships will take some time to occur. In the meantime, Oracle needs to improve top-line growth in order to boost investor confidence in the near term. However, the continuing macro-economic weakness and stiff competition will make execution rather difficult in the near term.

Currently, Oracle has a Zacks Rank #4 (Sell).

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