The J.P. Morgan of Silicon Valley

Is Larry Ellison the software industry’s savior?

Ellison: Not so enfant, not so terrible 

September has been a big month for Larry Ellison, the chief executive of software company Oracle Corp. Vanity Fair has a big feature on him and his 454-foot yacht, Rising Sun. (For Ellison, size matters.) On Sept. 12, Oracle announced the $5.85 billion acquisition of Siebel Systems. The same day, Ellison agreed to settle a lawsuit accusing him of dumping Oracle stock ahead of a bad earnings announcement by donating $100 million to charity. (This is small change for Ellison, who is the fifth-richest American, according to Forbes.)

Ellison founded Oracle in 1977, and he has been the enfant terrible of Silicon Valley ever since: brash, in-your-face, and daring—in the boardroom and on the sea. (His exploits in the fatal 1998 Sydney-Hobart boat race were chronicled in G. Bruce Knecht’s The Proving Ground.)But Ellison is enfant no longer, and he is somewhat less terrible as well. In the last few years, he has emerged as a slightly grizzled survivor, the rational, cool-thinking consolidator who arrives after the storm to buy out the victims. Ellison is becoming the J.P. Morgan of Silicon Valley.

Morgan helped rationalize the chaos of early 20th-century capitalism. At the beginning of the last century, the United States emerged from a boom-and-bust cycle. Urbanization, the rise of immigration, and the advent of new technologies spurred businesses to create a great deal of excess capacity: in railroads, telegraphs, steel, cars, shoes, you name it. The result was a slew of bankruptcies and profit-killing competition. Morgan used his capital to merge competitors into giant unitary entities like AT&T and U.S. Steel. Less ruinous competition, more profits.

At the beginning of the 21st century, Ellison is performing a similar function for the highly fragmented software industry. Fueled by venture capital, public investors, and insatiable demand for information technology, thousands of software companies rushed into the market in the 1990s. Then came the meltdown, and the enterprise software business—applications like databases and inventory-management software that help companies run their businesses more effectively—shifted into lower gear. Hundreds of companies, many of them well-capitalized, were left to fight bitterly over a market that was smaller than anticipated.

Oracle enjoyed the information-technology boom in the 1990s. And while its stock fell massively in 2001 and 2002—here’s the painful five-year chart—the company remained on an even keel, thanks to its balance sheet and its roster of big customers. Ellison saw more clearly than other CEOs that software wasn’t so different from railroads or automobiles before it. Software may have seemed the ultimate New Economy business—clean, with low distribution and manufacturing costs, and infinitely scalable—but it behaved like an Old Economy one. As Ellison said in the fall of 2003:

No industry remains in this fragmented form. The railroad industry didn’t, the automobile industry didn’t, nor will the computer industry. There’ll be far fewer companies. For example, there aren’t that many auto companies in the world. There doesn’t need to be, nor will there be thousands of software companies.

To Ellison, the solution was obvious. Make like Morgan. Remove or eliminate some of the competition by consolidating. After all, it’s tough to win customers away from rivals, because companies despise switching software. So, why not just buy the competition? Oracle, with its cash hoard and relatively strong stock, was a natural consolidator. The other likely giant, Microsoft, aroused too much suspicion in Silicon Valley and in Washington to start snapping up smaller competitors.

Like Morgan, Ellison has had run-ins with the antitrust cops. First he made a hostile bid for PeopleSoft, the big human-resources software company, in the summer of 2003. Ellison was undeterred by resistance from PeopleSoft’s management—who knew that Ellison would swing a heavy ax at the acquired company—and by the antitrust division of the Justice Department, which filed a lawsuit to block the merger. He won the lawsuit, and last December, Oracle finally amassed enough shares to assume control of PeopleSoft. The following month, Oracle said it planned to cut 5,000 jobs, about 10 percent of the total of the combined companies.

But as Ellison told the San Francisco Chronicle last May,that was just the beginning: “The industry is maturing. It is going to consolidate.” In recent months, he’s been collecting software companies. In May, Oracle agreed to buy Retek, which makes software for the retail industry, for about $630 million, gazumping a bid by German rival SAP. Then came data-management software company TimesTen (June),  ProfitLogic, which makes software for the retail industry (July), and a minority stake in Indian banking software company i-Flex (August). And now the big Siebel purchase in September, which simultaneously enriches and delivers comeuppance to company founder Thomas Siebel, who had left Oracle in 1990.

Like Morgan, Ellison clearly has an obsession with size.Ellison uses the Rising Sun, the world’s largest private yacht, to impress fellow billionaires. J.P. Morgan used his massive yacht, the Corsair, to the same effect. Also like Morgan, Ellison seems intentionally to cultivate a prickly public persona. Ellison may give his boats Japan-inspired names, and his compound in California may be modeled after a Japanese village. But one of his role models is a distinctly less placid consolidator from the Far East: Genghis Khan.

Oracle isn’t the biggest company in the technology universe—yet. Its market capitalization is about $62 billion, less than that of Cisco ($112 billion), Intel ($146 billion), Google ($86 billion), IBM ($126 billion), and Microsoft ($273 billion). But hundreds of enterprise software companies are still out there waiting to be bought, and Oracle has a healthy stock and a growing pile of cash.

Like Morgan, Ellison is in the business of delivering an unpleasant truth to CEOs of smaller companies: You won’t be able to make it on your own. Others may see his hostile bids as imperious and rapacious. But for the 61-year-old Ellison, who in 2003 married thirtysomething novelist Melanie Craft, it’s just a matter of finally acting like a grown-up. As he told biographer Matthew Symonds in Vanity Fair: “It’s very difficult for Silicon Valley to adjust to the notion that they won’t be forever young.”