In these uniquely unusual markets where growth is hard to find, my preferred investment category continues to be high-quality, large global franchise companies that sell their goods and services all over the world and possess a unique product or service that enables them to grow in even the most difficult economic environments.
One of my favorite global franchise companies is Oracle. Oracle sells a wide range of enterprise IT solutions, including customer relationship management databases, middleware and other software applications.
Oracle is one of the best-positioned “old-tech” enterprise software companies. Their database and middleware business — which accounts for most of their revenue — has high switching costs. This means that their customers are reluctant to change vendors. That’s because transporting data is not only expensive for companies, but also extremely risky as well.
This large embedded customer base generates tremendous cash flows as Oracle charges software licensing fees on a reoccurring basis. Using this on-going future cash flow stream to fund an active acquisition program is a fundamental component of Oracle’s overall growth strategy.
As I pointed out in a recent Money and Markets column, corporate acquisition activity is on the increase because growth through reinvestment is expensive and hard to come by. Thus, companies with loads of free cash flow, such as Oracle, have a tremendous competitive advantage in the current slow-growth world.
On Monday, the New York Times reported that Oracle’s acquisition machine was back in action again, as the software giant struck its biggest deal in five years. It agreed to buy Micros Systems, a specialty-software provider to restaurants and the hospitality industry, for $5.3 billion in cash.
|Oracle is on a buying spree.|
Indeed, Oracle is one of the most acquisitive companies in the corporate world. That’s because Oracle has announced 11 takeovers in the past 16 months alone with the acquisition of Micros representing its biggest takeover since its purchase of Sun Microsystems for about $7.4 billion in spring 2009.
The Micros deal will give Oracle control of a major provider of so-called point-of-sale systems like Internet-connected cash registers. Micros reports that its products are used on 330,000 sites in 180 countries.
“Oracle has successfully helped customers across multiple industries harness the power of cloud, mobile, social, big data and the Internet of things to transform their businesses,” Mark Hurd, an Oracle president, said in a statement. “We anticipate delivering compelling advantages to companies within the hospitality and retail industries with the acquisition of Micros.”
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Merger-and-acquisition activity is ramping up in the food and beverage industry because more than half of fine-dining and casual-dining operators plan to spend more on customer-facing technology according to a 2013 survey by the National Restaurant Association.
What’s more, the total point-of-sale software market in the U.S. has also expanded 3.3 percent annually from 2009 to a projected $1.3 billion this year, according to the market-research firm Ibisworld.
“It’s still a very untapped market,” said Dave Grimm, founding partner of Centennial, Colorado-based G4Technologies, of the restaurant industry. That’s set to change, he said, as “technology is such a part of everyone’s lives, people are going to wonder how they ever ran a restaurant without it.”
For a big technology company like Oracle, purchasing a restaurant-specific business also helps open the door for them to sell other parts of their product line-up to the establishments. Oracle has acquired several retail-specific software companies in the past few years to build up its offerings to restaurants, hotels and other hospitality providers.
Oracle bought Micros with this potential in mind, said Christine Dover, a research director at IDC. Oracle could create a platform that integrates services — including software for accounting, point of sale, workforce scheduling, and inventory management — into a single solution, she said.
The Micros deal was also a relative bargain at 17 times Micros’ earnings before interest, taxes, depreciation and amortization, compared with the median multiple of 22 for Internet and software acquisitions, according to data compiled by Bloomberg.
I view the Micros announcement as a big plus for Oracle because it signals that Oracle’s management remains focused on growth and will continue to be aggressive in deploying its huge cash reserves to maintain its dominant global position in the information technology industry. Oracle’s stock is up approximately 8 percent so far this year.