LITTLE ROCK — Oracle, once wary of Web based applications, has now embraced the cloud.
On Thursday, the technology giant agreed to buy Taleo, a maker of online human-resources software, for $1.9 billion. The acquisition - Oracle’s second major purchase of a cloud-related services company - underscores the shift taking place in the enterprise software industry as more businesses turn to the Web to run their operations.
“It’s a major move for Oracle,” Paul Hamerman, a Forrester analyst, said in an interview.
“Larry Ellison used to be quite vocal that this sector would not be very profitable, but he’s changed his tune because customers prefer the Web for certain applications,” he added, referring to Oracle’s co-founder and chief executive.
The billionaire’s vote of confidence is in many ways a coming-of-age moment for the market, which emerged during the late 1990s.
At the tail end of the dotcom boom, startups like Salesforce.com began to offer Web-based business applications on a subscription basis. The model stood in stark contrast to installed, or on-premise, software, which has long dominated the enterprise market. Unlike Web-based services, installed software typically involves upfront, often expensive, licenses and regular maintenance fees.
As the Web has matured, corporations have increasingly turned to the cloud, seeking flexible, online solutions that usually require minimal upkeep - a trend that has inspired a string of deals. In 2011, the volume of cloud-based enterprise deals hit $9.7 billion, a 59 percent increase from 2010, according to the 451 Group, a market research firm.
Oracle’s latest acquisition comes amid intensifying competition with its rival SAP, both of which are playing catch-up in this arena. In early December, SAP agreed to buy a Taleo rival, SuccessFactors, for $3.4 billion. That deal was viewed as a particularly rich one, valuing SuccessFactors at roughly 10times projected sales.
Shares of Taleo surged in the wake of SAP’s announcement in December, adding nearly 20 percent that month, as speculation mounted that it was a logical target for Oracle. Like SuccessFactors, Taleo specializes in software that helps businesses recruit and manage their employees online.
Under the terms of the Taleo deal, Oracle will pay $46 a share, about 18 percent above Taleo’s closing share price Wednesday. Taleo recorded $309 million of revenue for 2011.
“Human capital management has become a strategic initiative for organizations,” Thomas Kurian, an Oracle executive vice president, said in a statement. “Taleo’s industry leading talent management cloud is an important addition to the Oracle Public Cloud.”
The transition to the cloud has been an awkward one for Oracle.
The company, which still makes most of its money from selling hardware and installed software, has been hesitant to fully endorse a business model that threatened its profit margins. Though Ellison was an early backer of Salesforce.com and NetSuite, he resisted filling Oracle’s balance sheet with similar products. In a 2008 conference call, he told analysts that he struggled to identify a software-as-a-service provider that was successfully building its profits.
But Ellison’s tone has shifted.
In October, the company agreed to buy RightNow Technologies, a maker of Web-based customer service software, for $1.43 billion. Ellison also introduced the Oracle Public Cloud last fall, a platform for enterprise services, which represented the company’s first major initiative in the sector. With deep cash reserves and a long history of acquisitions, many analysts believe Taleo and RightNow could be the first of many cloud-centric purchases for Oracle.
“I think Oracle recognizes that these types of acquisitions may be dilutive to margins, but their customers are looking for these services,” Hamerman said.
Business, Pages 20 on 02/13/2012