Oracle Settles Kickback Suit - Analyst Blog

Software giant Oracle Corp. (ORCL) has agreed to pay $46.0 million to settle a kickback suit against Sun Microsystems. Oracle declined to comment.

The suit was filed back in 2004 in the federal court of Arkansas. The lawsuit alleged that Sun improperly paid kickbacks to systems integrator companies, like Accenture PLC (ACN), in return for recommendations that federal agencies buy Sun's products. In 2007, the U.S. government became a party to the suit.

In this context it is worth noting that in April 2009, Oracle announced the acquisition of Sun Microsystems for $7.4 billion ($9.50 a share) or $5.6 billion net of Sun's cash and debt.

Oracle also settled claims that Sun provided incomplete and incorrect information to the government officers during contract negotiations in the late 1990s. U.S. Postal Service later relied on the defective pricing information during contract negotiations with Sun, which cost taxpayers money, according to the government.

Earlier, in 2010, Department of Justice (DOJ) had said that the lawsuit covered software contracts that ran from 1998 to 2006 and were worth hundreds of millions of dollars.

Department of Justice said that the allegations were part of an ongoing investigation of government technology vendors that has resulted in settlements with six other companies including information technology (IT) hotshot Hewlett Packard Co. (HPQ).

In May 2010, storage giant EMC Corp. (EMC) paid $87.5 million to settle its lawsuit for overcharging government agencies and participating in a kickback scheme to influence the IT decisions of federal agencies.

Other IT companies that have settled similar lawsuits include International Business Machines (IBM), PricewaterhouseCoopers and Computer Sciences Corp. (CSC).

The Sun acquisition is expected to be accretive to Oracle's earnings by at least $0.15 per share on a non-GAAP basis in 2011. The acquired business will contribute over $1.5 billion to Oracle's non-GAAP operating profit in 2011 and over $2 billion in 2012. Revenues from Sun Microsystems are expected to be $9.6 billion in 2011.

We believe the acquisition will better place Oracle to compete against IBM, its biggest database software rival, as well as Hewlett-Packard and Cisco Systems Inc. (CSCO).

Oracle has a long history of fighting a number of lawsuits against leading companies. In August, 2010, Oracle filed a patent infringement lawsuit against premier search company Google Inc. (GOOG). The suit accused Google of infringing on patented Java technologies in its Linux-based Android mobile operating system.

Oracle fought a bitter lawsuit against SAP AG (SAP), which it eventually won. In November 2010, SAP was ordered by a federal jury in California to pay $1.3 billion to Oracle as a compensation for copyright infringement.

In September, 2010, Hewlett-Packard and Oracle settled a legal dispute over Oracle Corp's hiring of Mark Hurd as the co-president, a month after he was ousted in a controversial fashion from H-P.

Despite the claim, Oracle shares rose 3 cents and closed at $32.03.

Our Take

We are positive on Oracle's longer-term growth prospects; given its growing market share, focus on improving profitability, new product pipeline, cost saving initiatives and robust free cash flow. We maintain an Outperform rating on a long-term basis (6–12 months).

Currently, Oracle has a Zacks #1 Rank, which implies a Buy rating on a short-term basis.

 
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