Oracle/Microsoft

Who says investors hate aggressive acquirers? Since mid-2003, when Larry Ellison started betting Oracle’s cash on a series of aggressive deals, the software company’s shares have not really been punished. They have outperformed Microsoft, which used its cash more conservatively. This year, as investors have got more comfortable, Oracle’s shares have actually jumped 48 per cent compared with Microsoft’s 7 per cent.

Of course, it is not all about how each has used its firepower. Oracle’s recent share price run is partly down to the performance of its core database business. The growth potential of Windows and Office remains key for Microsoft investors.

But how they have used their balance sheets has been a factor. Since mid-2003, both have used cash equivalent to roughly one quarter of current market capitalisation on a mixture of shareholder payouts and acquisitions. In Oracle’s case, more than 70 per cent has gone on acquisitions. That has helped narrow rival SAP’s lead in enterprise applications – something Oracle could not have done by itself. It has left Oracle with only a small net cash position.

In Microsoft’s case, virtually all the cash went to shareholders. Although Microsoft has struggled to build its internet business, particularly in search, it is trying to narrow Google’s lead through investment rather than acquisition. It retains an inefficient balance sheet, with net cash and investments above $40bn.

In a world where tech companies are maturing and cash flows are more stable – hence the rash of interest from private equity – Oracle’s balance sheet looks more sensible.

Microsoft should reduce its cash pile further. Acquisitions would be risky. For example, Microsoft would face anti-trust risks if it tried buying Yahoo to bolster its internet position – as Oracle did buying PeopleSoft. Yahoo would also be more expensive than PeopleSoft and a riskier bet on growth rather than cost-cutting. But it would fill a gap. Having seen how investors have treated Mr “Splash the Cash” Ellison, Microsoft might one day feel emboldened to get more aggressive itself.