February 9, 2012 7:33 pm

Oracle in online shift with Taleo purchase

Oracle is set to take its biggest leap yet into the fast-growing world of cloud computing, announcing on Thursday that it would pay $1.9bn for Taleo, a US company which provides online human resources management software.

The deal echoes SAP’s pending $3.4bn acquisition of a similar company, Success Factors, and reflects an acceleration in the shift of some key aspects of business software to the internet. With companies such as Workday, an internet-based start-up, making inroads in the human resources area, the giants of the software industry have had to respond, said Paul Hamerman, an analyst at Forrester Research.

Larry Ellison, chief executive of Oracle, once dismissed cloud computing as “gibberish” and a passing fad, but has recently embarked on a number of acquisitions of companies offering internet-based software. The agreement to buy Taleo tops the $1.5bn that Oracle paid to acquire RightNow, which provides online software for managing customer services.

The shift to online delivery of software – known as “software as a service”, or SaaS – threatens to disrupt the traditional software business since customers pay through annual subscriptions, replacing the upfront sales that are central to Oracle and SAP.

Mr Hamerman said: “Oracle has been very reticent about SaaS, preferring the revenue recognition associated with its original licensing model.”

But he added that in human capital management – the name given to software from companies such as Taleo – and customer-relationship management, “the market has already voted” for online delivery, forcing Oracle to follow suit.

Oracle’s latest acquisition will revive an old battle in the software industry. A decade ago, the world’s second-biggest software company triggered consolidation in the industry with an unsolicited bid for PeopleSoft, a company selling traditional human resources software. Dave Duffield, the entrepreneur behind PeopleSoft, and Aneel Bhusri, a long-time ally, went on to found Workday, opening a new front by shifting their focus to online delivery.

Oracle, which has bought more than 70 companies in a $40bn buying spree over the past few years, is under pressure to lift sales growth after revealing in December that sales had only grown just 2 per cent in the three months to November.

Tim Jennings, chief analyst at Ovum, called Oracle’s move “the latest in an aggressive and competitive wave of market consolidation” in human resources software, following the Success Factors deal and Salesforce.com’s acquisition of Rypple.

Tools that allow companies to track and measure employees’ performance has become one of the high-growth areas in the software industry. An IDC study calculated a market growth rate of 41 per cent for the sector between 2009 and 2010. Taleo and Success Factors, both relatively young companies, were the leaders in the field.

Shareholders at Redwood City, California-based Taleo will receive $46 a share, an 18 per cent premium over Taleo’s closing price on Wednesday.

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