The Acquisition Candy Store, Part 1

I once had a conversation with a software company executive about capital allocation. Like many successful companies, his company was generating cash hand-over-fist. As part of his job, he recommended major capital allocation decisions.

We talked about the various options they had, and a little bit on how he thought about the returns on investment for internal projects versus business acquisitions.

Then I naively asked, "What about when you don't have any good reinvestment opportunities? Do you ever look at the return on investment of share repurchases, or even on paying a dividend and letting your shareholders reinvest somewhere else?" (You see, back in the Old Economy, where I work, we actually ask ourselves questions like this. Our shareholders ask us this too. A lot.)

Well, he gave me a look that blended the most profound, heartfelt feelings of sorrow, pity and regret. As if his hope for having an intelligent conversation with me had been cruelly and abruptly extinguished. His smile and enthusiasm collapsed. You poor, misguided fool, his features seemed to say. Did you really believe that crap they taught you in business school?

Needless to say, I found a way to change the subject. But it left me wondering...is there something about big, successful software companies that compels them to want to keep all the cash they generate, rather than give it back to their shareholders?

Now the executive I talked with most definitely did not work for Oracle, but Oracle might be a good illustration of this particular behavior. ORCL is certainly a reliable cash generator:



And, starting in 2004-2005, Oracle went on a tremendous spending spree. Not just the big name acquisitions, but a number of smaller companies as well. Look what happened to their goodwill line:



What was Oracle's software strategy here? Were these dozens of acquisitions made to support their business strategy, or were they seen as the most sensible way to keep the cash in the family?