Oracle Outbids SAP to Buy Retek

Analysis of News Events
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Last Tuesday, Oracle Corporation announced that it has signed a definitive agreement to acquire Retek, a leading provider of software for retailers, for $11.25 per share. The announcement, which capped a three-week bidding war for Retek between Oracle and SAP, gives Oracle a substantial share of a market in which it lacked a presence. It also gives IBM and the iSeries Division another reason to build closer ties to Oracle.

Under the agreement, Oracle will pay approximately $670 million to acquire Retek. That is a premium for a company that realized $174 million in revenues last year, but the price may well be worth it. With Retek under its wings, Oracle can finally compete effectively in the $6 billion market for distribution software. The acquisition fills a gap in Oracle's enterprise applications, which lacked supply chain, merchandising, and store management modules for retailers. The company also gets to add 200 of the world's best-known retailers--including Nordstrom and Wal-Mart--to its roster of enterprise software customers. Many of those Retek users will be open to working with Oracle, as around 80% of them already use the vendor's database products.

According to Oracle executives, little will change at Retek after the acquisition closes. Oracle intends to keep Retek's development, support, sales, and consulting teams intact at their current locations. In addition, Oracle has pledged to enhance, market, and support Retek's existing products. It also intends to incorporate Retek's applications into Project Fusion, its strategy for integrating its enterprise applications with those of PeopleSoft and J.D. Edwards. The company plans to offer initial releases of Fusion in the 2008 timeframe.

For the moment, it will be relatively easy for Oracle to sell Retek's existing applications along with its E-Business Suite. There is little functional overlap between the two product lines, and both lines rely heavily on Java-based development and runtime platforms. This should allow Oracle to become competitive rather quickly against SAP in retail accounts where it formerly had to partner with Retek to gain a hearing. However, SAP's failure to acquire Retek has not knocked the German-based software giant out of the running in the retail sector. SAP is spending heavily on the internal development of its retail applications and has its own stable of big retail names, including Home Depot and The Limited. In addition, SAP may take the money it was going to spend for Retek and use it to buy other retail software vendors.

With that last thought in mind, retailers should brace themselves for further consolidation of the distribution software industry. Indeed, future acquisitions may affect vendors that support the iSeries, such as JDA Software and Lawson. As a result, IBM and the iSeries management team may find themselves negotiating with fewer but larger distribution software vendors in the near future.

Such negotiations are likely on tap for IBM and Oracle because of the latter vendor's acquisition of Retek. While Retek has long been an Oracle partner, it also has a close relationship with Big Blue. Indeed, IBM counts Retek as one of its strategic alliance partners, a relationship under which Retek endorses and supports many of IBM's WebSphere products. In addition, IBM's eServer pSeries is the leading UNIX platform for Retek's applications.

This web of alliances creates a delicate situation for IBM and Oracle. On the one hand, the two companies should find it easy to be partners when it comes to selling Retek applications on IBM's servers or using IBM Global Services to install those applications. On the other hand, Oracle will have little appetite for selling Retek with IBM middleware products such as WebSphere Portal Server and Commerce Server. As such, anything that IBM gains in a partnership with Oracle on the hardware and services fronts may be lost in the middleware arena.

Still, it is imperative that IBM and Oracle work with each other, as both vendors know all too well. To keep its J.D. Edwards and PeopleSoft customers happy, Oracle needs IBM to support its iSeries, DB2, and WebSphere installations at those customers' sites. By the same token, IBM needs to maintain good relations with Oracle to maintain its product footprints at those same sites.

If IBM and Oracle successfully manage this delicate balance, it could benefit the iSeries. Since Retek supports IBM's AIX operating system, it could run quite well within AIX partitions on the eServer i5. If IBM were to gain Oracle's support for running Retek on the i5, the server could act as a consolidation platform for retail firms that own an iSeries but also run Retek on non-IBM UNIX servers. Such an offering would help the iSeries Division in its campaign to market the eServer i5 as a competitive replacement for UNIX servers from Hewlett-Packard and Sun Microsystems that are running at iSeries customer sites. However, that strategy may not pass muster with Oracle, which has hardware partnerships with HP and Sun as well as with IBM.

In short, Oracle's acquisition of Retek could serve to stretch, bend, or even break a few agreements between some of the IT industry's biggest players. Moreover, since the wave of vendor consolidation is still on a roll, IT customers should brace themselves for further uncertainty. While such shifting alliances will make it tougher for many customers to make certain IT decisions, they will also keep life in the software industry very entertaining.

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..