Financial engineering by tech dinosaurs pays off

Larry Ellison’s ongoing, stealth takeover of Oracle has turned into one of the software industry’s most intriguing, though least-noticed, sagas.

As co-founder of the database software company, Ellison had long owned around a fifth of the stock. Then, just over a decade ago, Oracle started repurchasing its shares in earnest, ploughing much of its free cash flow — along with tens of billions that it borrowed — into one of the biggest buyback programmes in corporate history.

Simply by sitting on his holding and not selling, Ellison has seen his personal stake increase steadily, to reach 43 per cent of Oracle. At that rate, he was on track to take majority control by 2026 — though the company (where he is chair and chief technology officer) temporarily cut back its repurchase programme last year while it pays off some of the debt from the acquisition of health IT company Cerner.

Along with a history of solid if unspectacular earnings, this judicious financial engineering has boosted the value of Ellison’s stake more than three-fold. His personal fortune has soared to more than $100bn, making him the world’s fourth-richest person, according to Forbes.

The latest hot trends in tech might grab the headlines, but they aren’t always where most of the money is to be made. That fact has been reinforced anew, as the heady valuations of high-growth tech stocks have collapsed and the virtues of steady cash flow, rigorous cost controls and deft financial manoeuvring take centre stage. 

Oracle was late to grasp the importance of cloud computing, despite Ellison’s protests that he had invented the idea. His company’s revenue has increased by less than a fifth since 2011, to $42bn. Over the same period, pioneering cloud company Salesforce — run by former Ellison protégé Marc Benioff — has lifted revenues from under $2bn to more than $31bn.

The stock market has handed Salesforce shareholders the bigger gains — though the stock price performance has not been as great as the sea-change in the IT world might lead you to expect.

Before a recent rally, Salesforce’s shares were up only around fourfold since 2011 — against a threefold gain for Oracle. Ellison’s company, unlike Benioff’s, has also made steady dividend payments. And given that most cloud companies have not performed as well as Salesforce, Oracle’s stock performance stands up well to much of the field.

Ellison’s Oracle takeover bears comparison with the more overt dealmaking of Michael Dell, another dinosaur in the tech industry. Whereas Ellison took on leverage slowly, Dell launched into a series of debt-fuelled buyouts — first of his own PC company, then of storage giant EMC and the software company it controlled, VMware.

The dealmaking has lifted Dell’s stake in his original business from 14 per cent a decade ago to 47 per cent now. A holding worth $3.4bn has turned into investments now valued at $36bn — most of it accounted for by a big personal stake in VMware, which has since been spun off again.

As financial engineering comes back into fashion, high-growth companies that had avoided it are coming under pressure to conform. Again, the comparison with Salesforce is instructive. 

While Oracle spent more than $150bn on buybacks to almost halve its share count since 2011, the number of Salesforce shares in circulation has nearly doubled. Some of that was to help pay for a string of takeovers that antagonised Wall Street and contributed to attention from a number of activist investors earlier this year. The rest of the increase came from the generous stock-based compensation for employees — another bone of contention with investors. 

Benioff sensed the change in the investment climate, even though his response was slower and less aggressive than investors wanted. Salesforce started to redirect excess cash flow to buybacks with its first stock buyback programme in 2022. It has since spent $4bn repurchasing its own shares. But it was only after some of the best-known activists on Wall Street piled in that Benioff’s attention shifted noticeably from growth to profitability — resulting in a 45 per cent rebound in the share price since the start of the year.

The Salesforce co-founder still believes his company is in the early stages of a long period of expansion, as the move to cloud computing remakes the entire IT world. If so, that will be the source of most of the gains his shareholders can expect in future years. But for now, Wall Street is looking for more immediate gratification.

richard.waters@ft.com