Oracle's Small Step, Bigger Plan

The acquisition of tiny ProfitLogic is a major move into the retail-software industry -- one that ups the pressure on SAP

When Oracle (ORCL ) announced its acquisition of privately held ProfitLogic on July 5, the markets yawned. The value of the deal wasn't disclosed, and analysts estimate that the tiny company will sell only $50 million in software next year, at best.Even the most generous estimates peg the deal below $200 million. Compare that to the headline-grabbing $10 billion acquisition of PeopleSoft and the purchase of Retek earlier this year, and tiny ProfitLogic would appear to be just a blip on Oracle's consolidation roadmap.

Don't be fooled. What this deal lacks in size, it makes up in strategy.

ADVANTAGE, ORACLE? Along with Retek, ProfitLogic is Oracle's second retail-software acquisition -- one of the few industries with a market still largely up for grabs. It's also one of two verticals that competitor SAP (SAP ) has openly said it's targeting for future growth, along with financial services. "Retail is a green field for both of us," Chief Executive Larry Ellison said in a recent interview with BusinessWeek. "That's where we can beat them." (See BW Online, 06/30/05, "Larry Ellison's Roving Eye".)

Both the PeopleSoft and Retek deals were about Oracle playing catch-up with SAP. The German giant dominates business software, and had a six-month lead in the retail industry specifically. But the ProfitLogic deal, while small, gives Oracle something SAP didn't have: so-called profit-optimization software, which helps retailers crunch all the data they collect from scanning purchases. That information enables stores to better predict what quantities of particular products they need to stock and how much to charge for them, even down to single items in individual stores.

"I think SAP is letting the retail vertical slip through its fingers," says analyst Pat Walravens of JMP Securities in San Francisco. "Oracle has taken a big step forward here."

KEY NICHE. It's not like SAP is standing still, however. It bid $496 million for Retek earlier this year in an attempt to gain more market share. That prompted a bidding war, which Oracle won with its final offer of $650 million.

According to some analysts, a similar scenario played out with ProfitLogic. Since it's a private company, none of those involved will comment. But Peter Coleman, an analyst at ThinkEquity Partners in San Francisco, says that ProfitLogic received competing bids -- and Oracle's was higher. "I have some friends very close to this deal, and what I heard was there was some desire to do a deal with SAP, but Oracle provided a bid that was irresistible," he says.

Why are Oracle and SAP intent on bolstering their retail smarts? It's one of the few industries with no dominant software player.

UP FOR GRABS. The market for enterprise resource planning (ERP) software, which includes applications that automate everything from human resources to accounting, grew at 14% last year -- with one-third due to favorable currency exchange rates. Meanwhile, the supply-chain software market, geared toward warehousing and logistics, increased by a lackluster 6%, according to AMR Research. Simply put, that section of the market is saturated. Most big companies interested in these applications already have bought them.

Two big exceptions: the retail and financial-services industries, where most companies have built their own software with the help of pricey consultants and in-house developers. Currently, retailers spend $20 billion a year on technology, with a good $7 billion or so on software alone, according to AMR Research.

One of the hottest-growing applications is the profit-optimization software that is ProfitLogic's specialty. "It allows you to improve margins or revenue without really doing anything," Walravens says. "You don't have to build new warehouses or add square footage or be nicer to customers. All you do is change the prices."

"WAKE-UP CALL." ProfitLogic had built a base of about 30 customers, some 95% of which already run on Oracle's databases, with 25% also using Retek's software. That will make integration of all the products easier, company executives pointed out in a July 5 conference call. Most of ProfitLogic's customers are clothing and department stores such as Bloomingdales and Federated Department Stores (FD ).

In all, Oracle now has 1,900 retail customers. SAP still has the lead with 2,400 retail customers, including Fossil (FOSL ), JCrew, and Home Depot (HD ). And one retailer -- Samsonite -- has switched to SAP since Oracle bought Retek. "We will successfully meet any competitive challenge in this market segment," SAP said in a statement.

That will likely mean more deals from both sides. From private companies' perspective, the software rivals' bidding war is yielding better prices than they could likely achieve by taking the IPO route and going public.

Now close to being able to offer just about any software a retailer could want, Oracle doesn't seem to be pausing to digest its purchases. Meanwhile, analysts say SAP might want to rethink its acquisition strategy before the retail market slips away. "I think this is a wake-up call for [SAP]," ThinkEquity's Coleman says. "Oracle is a deal or two away from locking up the vertical."

NEXT MOVE? Either outfit could strike next by buying a point-of-sale software product, like 360Commerce, a privately held company that analysts say is about the same size as ProfitLogic. Before too long, they also expect to see acquisitions of software companies that specialize in financial services.

These deals may not grab the same attention as a $10 billion hostile takeover, but strategically they're key if Oracle is to challenge SAP and expand from the core database and application-server businesses that still drive 80% of its revenues. "It's another skirmish in the global war of ERP domination," says Alexi Sarnevitz, research director at AMR Research. And with each purchase -- small or large -- that war is escalating.

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