Monday, June 30, 2014

Micros Buy Can Revive Oracle's Growth, and It's Just a Beginning

This article was originally published by TheStreet on June 24, 2014

By Sarfaraz A. Khan
NEW YORK (TheStreet) -- Oracle (ORCL_) announced the acquisition of the hospitality and restaurant technology provider Micros Systems (MCRS_) for $5.3 billion. It's the biggest deal ever in the point of sale systems market, as Oracle, the world's second largest maker of business software, looks towards external sources to revive its sluggish growth.
This is the latest in the string of takeovers in the hospitality and restaurant sector. The deal follows Priceline's  (PCLN_) $2.6 billion acquisition of restaurant reservation service provider OpenTable (OPEN_) and Google's (GOOG_)  (GOOGL_) acquisition of the restaurant website builder Appetas.

Oracle is paying a 17.8% premium over Micros System's closing price on June, 16, before markets started speculations about a possible deal. The transaction is expected to close in the second half of the current year.
The acquisition will likely give a much needed boost to Oracle's revenue and earnings from software maintenance and hardware while strengthening its position in the hospitality and retail sector. Moreover, the markets are also expecting additional acquisitions over the next two years that could fuel its growth over the long term.
Oracle's shares have risen by 7.8% this year and are currently trading near $41. The company has outperformed the S&P 500 ETF (SPY) which has risen by 6.4% for the year to date.
Oracle's acquisition comes after the company released its disappointing quarterly results that highlighted its flagging growth. For the three months ending May 31, Oracle reported a 3.4% year-over-year increase in revenue to $11.31 billion which translated into earnings of 92 cents a share. This growth was driven by 4% increase in software and cloud computing revenue to $8.9 billion.
The company ended up missing analysts' estimates of earnings of 95 cents a share from revenues of $11.48 billion.
However, this acquisition can expand Oracle's foothold in the hospitality and retail sectors, opening doors to a new income stream that will generate recurring revenues from software maintenance. The acquisition will also allow Oracle to grow its revenue from its hardware unit.
Micros Systems, which provides software services, and sells point of sales systems for hotels, restaurants and retailers, has said that more than 330,000 sites in 180 countries are currently using its products. The company has an impressive portfolio of clients which includes luxury hotel operators such as Hyatt (H_)H, Hilton (HLT_)HLT and Marriott (MAR_), fast food and quick service restaurant owners such as Yum! Brands (YUM_) and Burger King (BKW_); and retailers such as Lululemon (LULU_), Adidas (ADDYY_) and IKEA.
In its last quarterly results, Micros Systems generated 66% of its revenue by providing maintenance services, 23% by selling its hardware and 11% by selling its software.
Unlike Oracle, Micros Systems has been reporting double-digit growth rates over the last three years. In 2013, the company's revenue increased by 15% to $1.27 billion.
Micros System will likely continue growing as, according to the National Restaurant Association, fine, casual and family dining restaurants are expected to increase their technology spending. Meanwhile, the point of sale software market could grow by more than 3% this year, as per Ibisworld's estimates.
Oracle's CFO Safra Catz has said in a statement that the deal will be accretive to the company's adjusted earnings immediately. Over the next 12 months, according to analysts' estimates, Micros could increase Oracle's earnings by between 3 cents and 4 cents a share from a 3% to 4% increase in revenue.
Moreover, analysts have said that Oracle will announce some major acquisitions of between $15 billion and $20 billion over the next two years that could drive its top and bottom line growth. Despite reporting 11 takeovers over the last 16 months, Oracle still has ample fire power to do that. Last week, Catz said that Oracle's cash reserves, including marketable securities, stood at more than $39 billion.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.