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Oracle Acquires NetSuite - what does this mean?

Corinne Boyd

By Corinne Boyd Digital Marketing Manager, Updated 17 May 2017

On 28 July 2016, Oracle announced it was buying the pure-play cloud ERP vendor NetSuite. The transaction is valued at $109 per share in cash, or approximately $9.3 billion. The deal wasn’t exactly surprising, as the relationship between Oracle and NetSuite goes back decades. Evan Goldberg, the founder of NetSuite, and Zach Nelson, the NetSuite CEO, are previous employees of Oracle, and Oracle’s founder, Larry Ellison, has been a significant investor since he originally funded NetSuite in 1998. It’s arguably the first cloud company, providing customers financial and resource planning software through a subscription model. Ellison and his family own about 45.4% of NetSuite’s common stock, according to a recent company filing. On top of that, Oracle have not been shy about expressing their wishes to be “the biggest company in the cloud”, and NetSuite are making progress in the arena of two-tier ERP, which is when businesses use a product such as NetSuite for branch units and roll financials up into one big ERP. The transaction is expected to close within the year. 

What does Oracle buying NetSuite mean?

 

Why are Oracle buying NetSuite?

As their traditional client/server-based enterprise solutions become less popular, Oracle has been trying to shift from the old-fashioned method of selling software installed onto customer hardware to delivering it over the internet. However, in its most recent quarter, the company claimed that cloud division made up less than 10% of its sales. Buying NetSuite will aid Oracle in competing against rivals such as Microsoft,Salesforce.com and SAP. These other companies are intruding on the lead Oracle has on the market for enterprise systems built on its core database. Customers are buying full solutions instead of traditional Oracle infrastructure on which custom apps were built, and most of them are supplied in the cloud, especially in the mid-markets. Oracle is buying NetSuite for a hefty sum not just to boost its competitive position in the market for cloud services and develop its own cloud-based capabilities, but also to be more competitive in small- to mid-tier markets.

If Oracle hadn’t bought NetSuite, then it’s likely that a competing company would have. The culprit could have been Microsoft, SAP, Salesforce, or maybe Amazon, who now want to move away from just being a cloud server service and actually move their applications to the cloud. Buying Netsuite removes any potential threat from these competitors. NetSuite also provides an opportunity to sell into the rapidly growing market of its mid-tier accounts, something that Oracle has been having difficulty with.

Oracle now has five competing products: Oracle EBS, JD Edwards, PeopleSoft, Oracle Cloud and now NetSuite. Oracle now also have control of Open Air, a professional service solution acquired by NetSuite. There is still a lot of uncertainty as to how Oracle will now proceed from here. Oracle might position NetSuite as a solution for mid-size businesses, whereas Oracle Cloud would cover large enterprises. It’s unclear how Oracle is going to invest in each product, or if each system is going to have individual product teams working on them or not.

How will this affect NetSuite users?

Of course nothing is certain, but it seems likely that NetSuite’s product development, product support and professional services will be absorbed into Oracle’s existing administrative structure and corresponding operations. The deal is not just beneficial for Oracle, as NetSuite can now benefit from Oracle’s global scale and increase the traction of their pace of innovation and size of their two-tier customer base. Both companies complement each other, and their approaches towards products, sales and partnerships are quite similar. What is also likely is that NetSuite users will have to adjust to some inevitable changes. The rate of product releases from NetSuite Research and Development, which typically releases several major products a year, might be altered, for better or worse. NetSuite’s business practices might change to suit Oracle’s as well. NetSuite’s pricing strategies could be changed to reflect Oracle’s strategies, as could their approach to contract negotiations. For some sort of precedent, NetSuite users can look at Oracle’s acquisition of PeopleSoft in the mid-200s for $10.4 billion, the only of Oracle’s acquisitions bigger than NetSuite. Though Oracle claims it will run NetSuite as an independent company, if its acquisition of PeopleSoft is anything to go by, it won’t be long before they end up assimilating NetSuite into its own services. This could mean that NetSuite users end up paying more for the service.

How will this affect companies looking to move their finance functionality to The Cloud?

Companies in the market looking for new finance and accounting systems now have less choice. NetSuite was built to compete in the mid-market space, and butts heads with vendors of traditional on-premise systems such as Infor, Epicor and Intacct. Oracle’s Cloud Finance applications were designed for large companies, but Oracle’s success with these systems have mostly been in the mid-market space. This puts Oracle Cloud in direct competition with NetSuite. The acquisition of NetSuite removes the amount of choice in the market, and less choice means less competition and less negotiating leverage.

The purchase of NetSuite provides Oracle with more prospects for cloud-based revenue, which is necessary for the company to stay afloat and relevant in the current market. NetSuite has the potential to make Oracle profitable again by streamlining the company and leveraging its channels and overhead functions. The benefit could be symbiotic; Oracle provides NetSuite with huge resources to improve both its services and its Research & Development team, consolidating NetSuite’s position as a key player in the market. Oracle is paying a premium on NetSuite’s share price, and the deal will earn Larry Ellison and his family interests a $3.5 billion profit. Some have claimed as a result of this that there may have been an ulterior motive to the deal on Ellison’s part. Whether this or true or not (more likely not, as Oracle disclosed that the deal was agreed upon by a subcommittee of independent directors), the logic seems to point to the deal being a smart agreement that’s beneficial to all parties.