Why An Amazon-Oracle Merger Is A Very Real Possibility

Per Trefis analysis, a merger of Amazon (NASDAQ:AMZN) and Oracle (NYSE:ORCL) could unlock significant value. While the idea may sound very ambitious, in order to keep itself at the top of the cloud technology food-chain, Oracle may be the best acquisition Amazon could ever make. We detail why Amazon could acquire Oracle, and also estimate how much a potential deal could be worth in an interactive dashboard. Our estimate is based on Oracle’s standalone value as well as its value as a part of the combined entity with Amazon. You can modify any of the key drivers to visualize the impact of changes on the potential acquisition price. Additionally, you can see more Trefis technology company data here.

Why we think Amazon can acquire Oracle

Overview of the Two Companies:

• Amazon was possibly the first vendor to have created the public cloud ecosystem in mid-2000s, but Oracle has been in the database business for nearly 40 years.
• The idea of Amazon Web Services (AWS) was to have infrastructure that could be rent out to customers who wanted lower bills for their storage and compute requirements. Per Trefis estimates, AWS commands an enterprise value of $493 billion at an EV/EBITDA of 27x (2020 EBITDA of $18 billion).
• Oracle was late to the game with its first generation of cloud offerings failing and the company subsequently investing heavily in development to bring to market its Gen 2 cloud. Per Trefis estimates, Oracle should have an enterprise value of $251 billion at an EV/EBITDA of 12.7x (2020 EBITDA of $20 billion).
• AWS’s approach was creating a product and then have users adopt it. Oracle has had that user base for a long time and was unable to service the need that AWS was able to cater to. The result was AWS today commands over 40% in the public cloud market with Oracle not even in the top 5, despite Oracle running nearly 50% of the world’s databases.

Rationale #1: Customers will get the security of Gen 2’s architecture and AWS’s customer service, leading to a differentiated product versus competition

• AWS’s early mover advantage may now be waning on account of competition in the market from Microsoft Azure (which has become the underlying fabric of Microsoft’s B2B and B2C offerings), Google Cloud (under its new chief) and IBM’s cloud offerings (post the Red Hat deal).
• Another factor weighing against the incumbent cloud leaders is the drying up of the low hanging workloads that could have been migrated to the cloud. The remaining workloads are mostly mission critical and have high security requirements.
• Another factor that goes against AWS in this contest are the list of data breaches that have occurred at AWS customers such as Capital One, Malido Air etc. During Oracle’s annual analyst meet, Larry Ellison was vocal about how Gen 2’s architecture could have avoided such breaches.

Rationale #2: AWS is yet to create a credible database alternative to Oracle. Bringing Oracle’s database on AWS could make the combination the de facto choice for start-ups and enterprises alike

• Oracle has been trying to move its databases to the Oracle cloud, the company’s software growth has not been able to offset declines in its other businesses.
• On the other hand, AWS has had a preferred partnership with VMware to bring AWS to on-premise systems (where Oracle and Microsoft have a leadership position).
• Considering that Oracle wants customers to move to a cloud and AWS wants on-premise customers to expand into, we think Oracle and AWS represent a good complementary pair.

Based on our revenue and EBITDA forecasts for Amazon and Oracle, and our estimates for potential gains as a combined entity, we believe that there Amazon can profitably acquire Oracle for a figure that is at a substantial premium to its current market cap.

What are the risks and hurdles to a potential combination?

A merger between the two tech giants comes with its own set of risks and hurdles though, including:

1. History of rivalry:

• AWS’s Andy Jassy and Oracle’s Larry Ellison have been embroiled in a war of words about each other’s products and operational strategies for years.
• However, during Oracle’s 2019 analyst day event Ellison appeared to be more respectful of AWS

2. Technology stack combination considerations:

• Oracle’s Gen 2 cloud separates the client and cloud control computers, while AWS runs a huge distributed system.
• The cost of integrating the two system and applying Oracle’s autonomous database capabilities to AWS’s offerings could pose a technology challenge due to the size of the combined customer base and their diverse requirements.

3. Anti-competitive concerns:

• With a share of well over 40% in the public cloud market and over 50% in the database market, the combined entity is likely to attract a lot of regulatory scrutiny in terms of how it will affect competition.

4. The sheer size of the deal:

• We value Amazon’s AWS division at $493 billion and Oracle at $250 billion.
• At an estimated valuation of just under $1.1 trillion, Amazon is the larger company by a substantial margin
• Keeping Amazon’s growing presence in several nascent industries, a merger will essentially bring Oracle under AWS’s fold.
• Amazon will have to cough up a significant premium to Oracle’s current market value in order to finalize a deal.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.