The “cloud” is one of the hottest trends in tech. Essentially, it allows businesses to access software via the Internet. This often results in lower costs, because there is no need for servers and other hardware. At the same time, customers often realize improvements in productivity.
Yet for software veterans like Oracle (Nasdaq:ORCL) CEO Larry Ellison, the belief was that the cloud wasn’t a viable option, especially for large businesses. But customers aren’t listening and have been moving aggressively toward cloud technologies.
This week, Ellison finally caved in, paying $1.43 billion for RightNow Technologies (Nasdaq:RNOW), a top operator of cloud-based customer service software. The deal is certainly an important move for Oracle, which has been fairly restrained in its deal-making lately (the last major deal was for Sun Microsystems, which was struck in 2010).
And the valuation was far from cheap. Oracle paid roughly 6.5 times revenue for RightNow.
This deal could be the start of a consolidation wave in the sector. Companies like IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), Microsoft (Nasdaq:MSFT) and SAP (NYSE:SAP) generally have traditional software offerings, but according to a report from the Society for Information Management, the cloud is the No. 1 priority for information technology managers.
A way to deal with this gap is through acquisitions. Here are three possible buyout targets:
SuccessFactors (Nasdaq:SFSF): The company has a big-time mission: to increase the execution of every customer by 50%. Who wouldn’t want this? So far, the company has more than 3,500 customers across 168 countries. More than 15 million subscribers use the software.
SuccessFactors’s software provides for a wide array of functions, including compensation management, recruiting, goal-setting, workforce analytics and performance management.
In fact, SuccessFactors recently announced that it expects a much stronger third quarter, boosting its revenue target. In other words, the company is seeing lots of momentum – despite the slowing economy.
Cornerstone OnDemand (Nasdaq:CSOD): The company’s software helps with learning management, succession planning, enterprise social networking and performance management. And yes, the growth has been strong. In the latest quarter, revenue spiked 64% to $17.4 million. Bookings also were up 90%.
Even though Cornerstone is still a fairly small company, it does have global reach. The company has 6 million users across 176 countries and its software has been translated in 28 languages.
A key part of the company’s go-to-market strategy has been partnerships. Perhaps the most important one is with ADP (NYSE:ADP), which could be the company that ultimately buys Cornerstone.
NetSuite (NYSE:N): This company is a pioneer of the cloud space, having been founded in 1998. Since then, the company has developed a full-blown enterprise resource planning platform that has functions like payroll, human resources and inventory management. What’s more, these are built for global operators, with such features as support for multiple currencies and subsidiaries. There are more than 10,000 customers on the NetSuite system.
Keep in mind that this specific market is tough to crack. Let’s face it: it’s the kind of technology that a company does not like to change because of the disruptions and high costs. Yet NetSuite has been able to grow. In the latest quarter, revenue increased by 23%.
Actually, NetSuite has been getting a lot of traction snagging large customers. One of its latest wins was for Qualcomm (Nasdaq:QCOM), and Groupon also is a customer.
Interestingly enough, Oracle is probably the most likely buyer of NetSuite. After all, Ellison personally owns or controls over 50% of the outstanding shares.
Tom Taulli runs the InvestorPlace blog “IPO Playbook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter @ttaulli. As of this writing, he did not own a positioning any of the stocks named here.
