The cloud continues to get more concentrated. Oracle (NASDAQ:ORCL) has agreed to shell out $1.9 billion for Taleo (NASDAQ:TLEO), a provider of talent management software. It’s the first big cloud-computing acquisition of 2012, but it shouldn’t come as a surprise.
In December, I had a chance to interview tech-industry veteran Andrew “Flip” Filipowski. During the 1980s, he created the largest software company, Cullinet, and then came on board Platinum, which he sold to CA (NYSE:CA) for $4 billion. He’s now at SilkRoad, which is a top player in the fast-growing cloud market. In that interview, “3 Truths of the Cloud,” Flip said we should expect lots of consolidation in the industry.
And he was right. Oracle’s offer of $46 a share represents a 17% premium for Taleo, which has been the subject of lots of buyout rumors lately. In fact, in December the stock reached a 52-week high of $42.24.
Oracle’s legendary CEO and founder, Larry Ellison, certainly understands when certain type of technologies are ready for major adoption. Interestingly enough, he’s one of the pioneers of the cloud industry. Back in 1999, he invested in both NetSuite (NYSE:N) and Salesforce.com (NYSE:CRM).
But it now looks like the cloud has finally become strategic, so Ellison is willing pay up to get a large piece of the market. For example, last year he spent $1.5 billion for RightNow.
And Oracle isn’t likely to stop. Since Ellison still owns a majority of NetSuite, it seems inevitable that he’ll purchase this company, which has a current market cap of $3.1 billion, as well.
As for the Taleo deal, it does look expensive. The multiple is at 44 times pretax earnings. Yet the company is likely to continue to grow at a strong rate as it benefits from Oracle’s huge customer base. In addition, cost savings could be considerable as well.
Oracle’s deal will probably lead to more M&A activity from other larger cloud operators like SAP (NYSE:SAP), IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT).
Indeed, investors have already been anticipating this move. Here’s a look at the returns for the last six months:
Still, investors need to be cautious with these kinds of stocks. Even if there are more buyouts, there’s no guarantee that the premiums will be substantial.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.