It’s win or go home for Oracle and its bid for NetSuite

Contact: Brenon Daly

Just like this year’s World Series, there’s a dramatic win-or-go-home contest playing out in the tech M&A market. The showdown pits the ever-acquisitive Oracle against one of Wall Street’s biggest investors. The stakes? The fate of the largest SaaS acquisition ever proposed.

At midnight tonight, Oracle’s massive $9.5bn bid for NetSuite will effectively expire. In the original offer three months ago, Oracle said it will pay $109 for each of the nearly 87 million (fully diluted) shares of NetSuite, valuing the subscription-based ERP vendor at $9.5bn. That wasn’t enough for NetSuite’s second-largest shareholder, T. Rowe Price. Instead, the institutional investor suggested that Oracle pay $133 for each NetSuite share, adding $2bn to the (hypothetical) price tag.

Oracle has declined to top its own bid. Nor will it adjust the other major variable in negotiations: time. (Oracle has already extended the deal’s deadline once, and says it won’t do it again.) In an unusually public display of brinkmanship in M&A, Oracle has said it will walk away from its $9.5bn bid if enough shareholders don’t sign off on its ‘best and final offer.’ As things stand, shareholder support is far below the required level, largely because of T. Rowe’s opposition.

Does T. Rowe have a case that Oracle is shortchanging NetSuite shareholders with a discount bid? Or is the investment firm greedily hoping to fatten its return on NetSuite by baiting Oracle to spend more money? If we look at the proposed valuation for NetSuite, it’s hardly a low-ball offer. On the basis of enterprise value, Oracle’s current bid values NetSuite at 11.1x trailing sales. That’s solidly ahead of the average M&A multiple of 10.3x trailing sales for other large-scale horizontal SaaS providers, according to 451 Research’s M&A KnowledgeBase. (For the record, T. Rowe’s proposed valuation of $11.6bn for NetSuite roughly equates to 13.7x trailing sales – a full turn higher than any other major SaaS transaction.)

With the two sides appearing unwilling to budge, NetSuite will likely return to its status as a stand-alone software firm. If that is indeed the case, NetSuite will probably have to get used to that status. The roughly 40% stake of NetSuite held by Oracle chairman Larry Ellison serves as a powerful deterrent to any other would-be bidder, which was one of the points T. Rowe raised in its rejection of the deal. Assuming 18-year-old NetSuite stands once again on its own, the first order of business will be to pick up growth again. (Although there’s still the small matter of a $300m termination fee in the transaction.) In its Q3, NetSuite reported that revenue increased just 26%, down from 30% in the first half of the year and 33% for the full-year 2015.

Select multibillion-dollar SaaS deals

Date announced Acquirer Target Deal value Price/trailing sales multiple
July 28, 2016 Oracle NetSuite $9.3bn 11.1x
September 18, 2014 SAP Concur $8.3bn 12.4x
May 22, 2012 SAP Ariba $4.5bn 8.6x
December 3, 2011 SAP SuccessFactors $3.6bn 11.7x
June 1, 2016 Salesforce Demandware $2.8bn 11x
June 4, 2013 Salesforce ExactTarget $2.5bn 7.6x

Source: 451 Research’s M&A KnowledgeBase