Although the deal makes strategic sense for Oracle, however, since Ellison has a 40% stake in NetSuite, in case of an overpayment, the deal could face strong headwinds.
In a deal that is likely to provide Oracle, a bigger pie of the cloud computing business, Oracle Corp has disclosed that it is set to acquire NetSuite Inc. for nearly $9.3 billion.
This is likely to result in an even bigger pay for Larry Ellison, Oracle’s executive chairman, since, as per regulatory filings, he holds a 40% stake in NetSuite as of February. If the deal closes, his stake in NetSuite would be around $3.5 billion.
As per Corporate governance consultants, Ellison’s holdings in NetSuite will naturally be scrutinized. However, these are likely to be passed since the deal and NetSuite’s structure makes strategic sense for Oracle.
“People care (about governance) when someone makes the wrong decision,” said Kevin McManus, VP of Egan-Jones Proxy Services. “But if the merger makes sense for the market, it’s going to be hard to complain too much.”
With the news hitting the markets, NetSuite’s shares surged by 18% to $108.41, just shy of the offer price of $109 a share in cash. Oracle’s shares also rose by 0.6%.
“It’s definitely pricey from Oracle’s perspective, but it’s understandable and it’s justifiable especially in this environment,” said Rodney Nelson, an analyst with Morningstar.
Both, NetSuite and Oracle offer software solutions which automate administrative and back end operations.
Incidentally, Zach Nelson, NetSuite’s chief executive, was responsible for Oracle’s global marketing from 1996 to 1998.
Like its rivals, Microsoft, SAP and Amazon.com, of late, Oracle has focused on moving its business toward the cloud-computing model as sales in its traditional software license business have tended to struggle.
The deal could be instrumental for Oracle as it plays catch up with competitors such as Salesforce.com and Workday Inc., which specializes in cloud based offerings.
According to analysts at Jefferies who in a note to clients said although the deal provides immediate and significant entry into the mid-market for corporate applications for Oracle, “the price paid [however] seems steep.”
The company expects the deal to add to its adjusted earnings in the first full fiscal year after it closes.
“A regulatory review and shareholder lawsuits are likely given the family’s ownership stake. However, we don’t view these as material risks to the transaction going through,” wrote Joel Fishbein, an analyst with BTIG in a note to clients.
As per Paul Hodgson, an independent governance consultant, a factor in the governance debate is whether Oracle overpaid for NetSuite.
“If it did, then that is a conflict of interest. If it paid what the market considers a fair price, then it’s fine,” he said.