Oracle to spend US$1B for Art Technology

Summary

Oracle Corp. will acquire Art Technology Group for $1 billion in cash, adding e-commerce programs to the software maker’s inventory. The purchase will give Art Technology Investors US $6 per share, 46% more than the company’s closing price. Art Technology`s sales have declined for four years until 2004. Oracle has already acquired 65 companies over the last five years and will continue to purchase software making companies. The software maker had $23 billion in short term assets at the end of the first quarter of this fiscal year before purchasing Art Technology, their ninth company in 2010. Competitors Hewlett Packard Co. and International Business Machines Corp are also acquiring companies. IBM has 15 acquisitions while HP has announced 8.

Connections

Chapter two in the textbook analyzes many different types of transactions. The transaction in this article can be analyzed in the same way. The article states that Oracle agrees to buy Art Technology Group. Assuming Oracle pays using cash, Oracle will lose $1 billion in cash and will gain an asset worth the same amount. The cash account will be credited by $1 billion and a new asset account will be debited by an equal amount. This is a simple exchange in assets and would therefore have no effect on the accounting equation. Art Technology Group has future value to the company and would therefore be classified as an asset. On the cash flow statement, which is also touched upon in this chapter, this transaction will be recorded under investing activities. Using the example on page 104 in the textbook as a guide, the transaction will be recorded as an item called "acquisition of Art Technology Group".

Reflections

Art Technology’s net income has risen rapidly, increasing from net loss of $4.2 million at the end of 2007 to $16.8 million at the end of 2009. As we look further back on the company`s annual net incomes however, their earnings have been proven to be very inconsistent. Despite this, with $23.6 billion to spare, the purchase of this company only cost Oracle a small fraction of their assets. In the long run, this could end up being a great investment if Art Technology continues to put up good results like in the past 3 years. Oracle has already 65 acquisitions since 2006. These acquisitions provided a major boost in the software maker’s earnings. Over a 5 year span, Oracle has almost doubled their net income since acquiring their first company, earning $6.1 billion in 2010 compared to $3.4 billion in 2006. Oracle’s net income will continue to trend upwards as they acquire more companies like Art Technology. Oracle’s competitors, Hewlett-Packard Co. and International Business Machines Corp are also buying into these profit generating investments. Competition will be close as these software making companies continue to bolster their profits by acquiring companies.

http://www.financialpost.com/news/technology/Oracle+spend+Technology/3767705/story.html

Oracle's Income Statement

Art Technology's Income Statement