The Acquisition Candy Store, Part 2

Oracle's three-year series of acquisitions, including most recently BEA Systems, appears to be the implementation of a "downstream" vertical integration strategy.

The underlying rationale (or "investment hypothesis") for this strategy might follow a chain of thought such as:

1. Oracle's core business, historically, has been the development and sales of relational database systems.



2. Oracle has attained an outstanding competitive position in the RDBMS market by excelling at its software development and sales processes.



3. Although the RDBMS market continues to grow, the market's growth has been slowing. Consequently there is less need and less opportunity to reinvest in the core business and instead Oracle now finds itself with a surplus of cash.



4. More alarming, Oracle's ability to grow profitably in the core RDBMS market is at risk. Open source and lower priced competitive products threaten to commoditize the database technology, eroding Oracle's pricing power in its core business.



5. There are no obvious ways to reinvigorate the core business, and so Oracle's best opportunity to continue growing is to find a "business adjacency" with greater profit potential than the core.



6. Oracle sees "downstream" vertical integration as the most logical business adjacency to pursue. Specifically, the enterprise applications software that runs on Oracle's databases, and the middleware that interconnects Oracle's databases with other corporate systems.



7. Oracle believes it is better to dominate the enterprise and middleware segments than to just participate selectively. (Perhaps Oracle believes there is value in being a single-point-of-contact vendor, or Oracle wants to create larger closed systems, or maybe Larry Ellison just wants to win here as badly as he wanted to win in RDBMS).



8. Acquisitions are a much more effective way to enter this segment than internal software development. A number of high-quality companies had already staked out positions in enterprise software and middleware, and it would be much faster and easier to acquire them than for Oracle to attempt to develop alternative products themselves.



9. Oracle therefore has launched a campaign to identify and acquire best-in-class software companies in all aspects of enterprise software and middleware.

Viewed in this light, Oracle's acquisition spree seems to make very good sense.

But it raises some questions as well.

To what extent is Oracle integrating its acquired companies into a common corporate structure and culture, or to what extent is Oracle continuing to let each one exist on its own? What value is Oracle adding to these companies by being their parent? Will customers prefer the one-stop-shopping approach that Oracle essentially will be offering, as opposed to selecting products from multiple vendors? How much do these moves threaten Oracle's other business partners, against whom Oracle is now competing more directly? Will Oracle be able to maintain the pace of technological innovation in its acquired companies, or will these businesses become less competitive?

All topics for a later time.