Knight Ridder/Tribune Business News
Nov. 4--ORACLE TRIES A FOURTH DIMENSION: In the beginning, Lawrence J. Ellison created Oracle Corp.'s (Nasdaq, ORCL) database business, and it was good.
But when that product line faltered, Ellison brought in Booze Allen & Hamilton consultant Raymond L. Lane, who boosted the company's fledgling consulting practice and helped develop a still burgeoning software applications business.
Now, as Chairman and CEO Ellison hones his message of network computing and a former rival (Sybase ex-CEO Mitchell Kertzman) joins Oracle's would-be Internet software spin-off, Network Computer Inc., President and Chief Operating Officer Lane is spearheading what Oracle hopes will be a fourth pillar to its slowing businesses. Oracle is developing a unit that will provide, for a fee, online management of functions like financial reporting and human resources for customers who currently buy its applications.
The project is known in industry jargon as a "service bureau." It still is in the pilot stage, and although Oracle plans to launch it formally next year it shouldn't be a meaningful contributor to the company's revenue until after the turn of the century.
Investors should care, however, because its very existence suggests Oracle has a long-term growth plan that goes beyond jawboning Microsoft Corp. (Nasdaq, MSFT) and butting heads with similarly flailing enterprise software makers like PeopleSoft Inc. (Nasdaq, PSFT) and Baan Cos. (Nasdaq, BAANF).
"We're pretty bullish on it," Lane told a gathering of tech-industry CEOs in La Jolla earlier in the week. "We think it's the next big thing."
The notion is something of a big deal almost because Lane says so. He won't disclose how much Oracle is spending to develop the new business or what the revenue targets are. He notes only that industry analyst Forrester Research Inc. believes such a niche for network management of applications services will generate $6 billion of revenues by 2001. He doesn't endorse Forrester's assessment of the market size but suggests there will be revenues aplenty for Oracle.
And Oracle will need them. The company's database business is hugely successful but mature. According to Lane, there is only one Fortune 100 industrial company (he can't recall the name) that is not an Oracle database customer. More, Oracle's stock is stuck. It has traded between about $20 and $30 for all of 1998, after briefly topping $40 last year.
Lane notes that America Online Inc. (NYSE, AOL) has a market value of $29 billion, an amount equal to about 210 times its trailing earnings. In comparison, Oracle's capitalization is about the same but its valuation is only 30 times earnings.
Says Lane: "If they can create that kind of market cap dealing in the consumer market, imagine what someone could do in the business market," which is far bigger.
A word of caution. Oracle's plan carries a high degree of danger. If it works, it implicitly siphons off some of its existing business by giving customers an easier way to gain access to its products.
In other words, subscribing to an Oracle-managed network for salesforce automation, for example, obviates the need for a company to purchase and implement Oracle's application in that field. Oracle still gets the revenue, but it changes the entire way its highly motivated salesforce completes deals.
Still, the history of Silicon Valley suggests that companies trying to stay one step ahead of their industries are more likely to succeed than those who play defense.
Concludes Lane: "It may be the last change our industry ever sees."
THE NEXT AMAZON? It's got the name, it's got the backers and it's got the market. It's even on the verge of having the hype. Meet the next start-up that will generate "e-excitement" if it tries next year to go public: eToys Inc.
The Santa Monica company just passed its first birthday, but already boasts a toy inventory larger than "off-line" retailer Toys R Us Inc. (NYSE, TOY). It's funded by a unit of Intel Corp. (Nasdaq, INTC) and Sequoia Capital, which is best known for its early bets on Cisco Systems Inc. (Nasdaq, CSCO) and Yahoo Inc. (Nasdaq, YHOO).
But what really promises to make eToys a roaring success with investors is that it's got a cool story everyone who's ever bought a toy can understand.
eToys CEO Toby Lenk, an ex-Walt Disney Co. (NYSE, DIS) executive, enumerates the litany of reasons "toy stores stink." Bringing kids there is problematic, customer service and product information are scarce, stores are not well-organized by age, and selection is spotty and unreliable.
Lenk suggests these last problems aren't acceptable and conveys this message in language high-tech CEOs at Red Herring magazine's "NDA '98" conference understand well. When shopping for a child's birthday present, for example, "This is a mission-critical deadline."
Lenk has "no comment" on rumors Amazon.com Inc. (Nasdaq, AMZN) already has offered to buy eToys. He's also mum on revenues for the young company though he readily admits it is losing money as it spends heavily to build its brand.
If its first nationally broadcast television ad is any indication, however, eToys is spending its money well. The spot features a combat-fatigued mom (85 percent of eToys' customers are women) negotiating the war zone of a toy store. After suffering repeated indignities, she declares: "I love the smell of Play-Doh in the morning."
Said one bigwig who watched the spot, noting the crowd's roar at the tag line: "They could GO public on the Play-Doh line alone."
IPO CANDOR ALERT: There are rare moments when the habitually guarded -- like investment bankers -- speak candidly about the stock market. These are the moments to pay attention.
Paul F. Deninger, chairman and CEO of the Fort Lee, N.J.-based investment bank Broadview Associates LLC, notes that of 803 technology-oriented U.S. initial public offerings since 1992, 58 percent are trading below the levels at which the companies offered shares to the public. Forty-five percent of those drifted below that mark of shame within a year, he says.
Rather than invest in IPOs, "you might as well put your money in a mattress," he concludes.
If the subject is most IPOs, Deninger is right, of course, though his assertion is sort of like a fraternity brother reciting aloud the house's secret password.
It pays to understand Deninger's bias. His firm doesn't compete head-on for underwriting IPOs with so-called bulge-bracket investment banks like Morgan Stanley Dean Witter Inc. or tech-focused boutiques like Hambrecht & Quist LLC. Instead, it earns its keep by advising on mergers. Hence his willingness to derogate IPOs.
Self-serving or not, Deninger's analysis is correct. It's important for investors in new issues to understand who are the certain winners, no matter what the post-IPO performance: the bankers, lawyers, venture capitalists and company insiders who will get theirs as long as the deal is successful at the outset.
Contact Adam Lashinsky at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190, or siliconstreet(at)sjmercury.com or 408-271-3782
Visit Mercury Center, the World Wide Web site of the San Jose Mercury News, at http://www.sjmercury.com
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