The American Spectator: Monty Python M&A

Software is a bizarre business and so are the people in it. Bill Gates may be King of the Geeks, but Larry Ellison, founder, chairman and CEO of Oracle Corporation, is King Arthur searching for the Holy Grail­the Monty Python version.

Programmers at Oracle, like any good software company, work late into the night, often turning off the lights, turning up the brightness of their monitors and wearing dark sunglasses. They code applications for which corporations pay hundreds of thousands, even millions of dollars, to help build better mousetraps, manage their global assets or whatever else they do. The software itself is just a flip of a tiny magnet on a hard disk’s platter. But Ellison has made a fortune charging lots for these little bit flips. Customers pay a fortune for one reason, they can make mousetraps more productively. Now he wants to kill every other software company for his own benefit.

And boy does he have benefits. MIG jets and America’s Cup yachts are only the most visible. His samurai-style estate, under construction for years in Woodside, California, will sport a 50-ton boulder in the master bathroom, so he can shower in a realistic waterfall. He sued (and lost) to blow through the curfew at San Jose Airport and bring in his noisy Gulfstream after dark. Ellison personally supports several local school districts where his and his ex’s kids attend. I have been passed by Ellison in the morning a few times on Marsh Road in Menlo Park, heading towards 101. A red XJS was interesting, but the black Bentley Arnage quite stunning. I punched it to keep up, but he was long gone. I later heard stories of a lawyer on retainer full-time to Larry “Earnhardt” Ellison just to beat his speeding tickets.

Of course this is just noise­last I checked, Forbes had the guy ranked number six on their billionaire list, at $16 billion net worth. And that’s after the tech stock meltdown. Not bad, but poor Larry never finishes first. Bill Gates has the most valuable software company, Microsoft. Germany’s SAP is the largest application software company, the stuff businesses use to build those better mousetraps. Oracle is the leader in databases, information warehouse store and retrieve gear­an important but fading franchise. IBM, among others, has figured out that selling cheap databases helps them sell more heavy metal computers. If Oracle doesn’t do something, five years from now, it could end up yet another dead software companies. Not good for Larry.

C’mon, you may be saying­Oracle is too big and too important to fail. Perhaps, but in the alchemic world of software, stranger things have happened. Ask Oracle’s previous competitors Sybase, Informix and Ask, in the morgue or various states of disrepair.

In fact, software companies never really die, because someone, somewhere still uses the software, and needs to be supported. I still have a few Microsoft DOS machines. Much-discussed Computer Associates was the master at buying broken software companies, firing almost everybody, and maintaining the software just enough so customers could transition to something made by CA (and to fudge their books a bit, but that’s another story). CA was Dr. Kervorkian, putting almost dead companies out of their misery.

Ellison has watched this over the past fifteen years and has learned a trick or two. Early this summer, he announced a cash bid for the number-two enterprise software company PeopleSoft, with the idea of shutting it down and transitioning customers to Oracle’s competing applications. A bold euthanasia strategy. Just one problem. PeopleSoft is not dead. Indeed, like the hapless dismembered knight in Monty Python and the Holy Grail, PeopleSoft has spent the summer desperately declaring: “I’m not dead yet. In fact, I’m feeling much better.”

No matter. Ellison is pressing ahead. His original bid was barely 7 percent of Oracle’s own market capitalization. Bill Gates would love to do the same to kill Linux, the “open source” computer operating system now being given away for free vs. the $99 bucks he charges for Windows. Would you use seven percent of your company’s market capitalization to take out a competitor? Of course you would.

SAP and IBM are being proffered as white knights. I don’t think so. PeopleSoft has successfully employed the Nancy Reagan defense, “Just Say No.” Wall Street saved Peoplesoft’s butt, but the Street is fickle, you can only “Say No” once. Screw up, and the meat wagon is waiting.

Unfortunately, Ellison is exposing Oracle’s own soft white underbelly. His application business is the one that could be thrown on the undertaker’s wagon, a $500 million a year business and languishing. By launching this deal, many institutional investors are beginning to question Oracle’s own future. Databases are great, but why are there so many successful enterprise software companies out there, many of them run by ex-Oracle folks. Siebel is run by ex Oracle salesman Tom Siebel. Salesforce.com was the brainchild of ex Oracle honcho Marc Benioff. Even Peoplesoft is now run by ex Oracler Craig Conway. And these are not little niche companies. Any trend here?

Sure. No one wants to work for Larry. But Software is not a land grab like autos or oil. It’s the ability to harness those shades-wearing programming geeks. Do it successfully and you can spout cash like an Iraqi oil gusher. Fail, and it’s Dr. Kervorkian for you. Ellison will probably get bored with all this by year-end and walk away. But investors should be warned. Ellison has made the point loud and clear that you can forget about how much cash or how many customers a software company has. In Silicon Valley­as on Wall Street­the meat wagon comes around often, and those that fail to keep up are walking dead.

In the 1980s, Michael Milken milked the fat out of the Rust Belt. He also jumpstarted the cellular, cable and media business with financing neither banks nor the stock market would offer.

In the 1990s, the stock market woke up and provided all the capital ANY growth capital might want. We all know how that ended – the strong still standing, but lots of wannabes wandering aimlessly, looking under rocks for growth.

And now comes Ellison with Oracle’s $6 billion in cash, on the prowl for walking-dead companies to fold into his realm. Find your competitors, use your stock and cash to buy them, and then tell them to say their last prayers. Kill their products, and the customers be damned. I can think of a few industries where this might be useful­a couple of airlines, several auto manufacturers and maybe some insurance companies that could benefit from a lethal injection. But in technology, a visit from Dr. Ellison is probably premature. Most of post-bubble era tech companies are survivors, not dead yet, and you can’t just hit them in the head with a shovel. Among other things the stock market­bless its cold, calculating heart­won’t allow it.

Andy Kessler, a former Silicon Valley hedge fund manager, is the author of Wall Street Meat.