What Does Oracle-NetSuite Deal Mean For Ultimate Software And Workday?

Since Oracle Corporation ORCL announced the majority of unaffiliated NetSuite Inc N shareholders tendered their shares to its $109/share takeover offer, the next question on investors' minds should be what the impact of the acquisition will be for rivals The Ultimate Software Group, Inc. ULTI and Workday Inc WDAY.

Wedbush On Ultimate Software

Webush Securities commented that Oracle-NetSuite deal is a “minor negative’ for the Outperform-rated Ultimate Software, which has a partnership with NetSuite and competes a little bit with Oracle in mid-market human capital management (HCM).

About 10–15 percent of Ultimate Software’s new business from NetSuite partnership, and with the Oracle acquisition, the sales reps of Ultimate Software will have plenty of sales opportunities to pursue.

“We estimate the deal will have relatively minimal impact on ULTI’s FY17 revenue, as ULTI’s recurring revenue visibility for FY17 is almost complete,” analyst Steve Koenig wrote in a note.

Importantly, the analyst believes Oracle will retain the partnership to counter arch-rival Workday in mid-market HCM.

'Minor Positive' For Workday

Meanwhile, the deal is a “minor positive” for Workday, which competes with NetSuite in financial management applications/ ERP, although Workday’s customers are typically larger than NetSuite’s customers.

“If NetSuite’s momentum stalls under ORCL, WDAY might benefit in down-market competitions. We estimate financial management comprises about 10 percent of WDAY’s new business at present,” Koenig noted.

The Deal: Outcome Expectations

Oracle is paying $9.3 billion or $109/ share for NetSuite, a relatively high multiple for SaaS companies and compared to Oracle’s usual earlier acquisition parameters. Koeing estimates this transaction is worth 9.2x EV/ FY16 based on consensus estimates.

But, for its high price, Oracle is getting a leading cloud-based provider of enterprise resource planning and e-commerce, with a strong presence in the SMB and low-end enterprise market. The deal would significantly boost Oracle’s cloud capabilities and its presence in mid-markets.

Oracle expects the deal to be immediately accretive in the first full fiscal year after closing (i.e., FY 2018). Koenig expects the deal to be Neutral for Oracle.

“This deal will likely add about $1.5 billion to ORCL’s SaaS and PaaS FY17 revenue line, which we currently estimate at $3.9 billion prior to the acquisition. Our back-of-the-envelope indicates that the transaction is less than a penny accretive on a cash basis in FY17,” Koeing highlighted.

The analyst also expects the deal to be $0.06–$0.07 dilutive to Oracle’s annual EPS assuming the $9.3 billion was taken out of the $14 billion notes offering in late June that carries interest rates in the range of 1.9–4 percent.

The deal was in lingering in uncertainty due to T. Rowe Price’s disapproval of the offer price, resulting Oracle extending the offer twice, but stuck to its original price. On November 5, Oracle announced that 53.21 percent of the total unaffiliated shares tendered to its offer.

Oracle will complete its acquisition of NetSuite on Monday.

Shares of Oracle closed Friday’s trading at $38.28 and NetSuite at $90.34. In the pre-market hours Monday, NetSuite shares climbed 21 percent to $109.01.