Oracle Corp (NYSE:ORCL) announced on Friday a definitive agreement to buy out Responsys Inc., the maker of cloud marketing software used by companies to develop and enhance effectiveness of marketing programs. Responsys stock price jumped up by 40% in response to the announcement, closing the Dec 20, 2013 trading session at a stock price of $27.40. The move by Oracle comes five months after its competitor Salesforce.com acquired Responsys’ main competitor ExactTarget for $2.5 billion.
Oracle is reportedly buying out the marketing software firm for $27 a share. At the current number of outstanding shares, the total value paid by oracle will be to the tune of $1.39 billion in what will be an all cash transaction. We shall now take a look at fundamentals of Responsys, the current valuation of Responsys vis-à-vis competitors and the value of the acquisition to shareholders of Responsys Inc.
We now take a look at some of the fundamental factors of Responsys Inc. The chart below displays the Revenue v/s Expenses growth rate for the company.
The company had an average Y/Y revenue growth rate of 30.7% in the Last Twelve Months (LTM), a healthy fact by itself. However a worrying fact has been the faster growth rate in the expenses. The LTM operating expenses increased 47.8% on a Y/Y basis, primarily driven by a 55.5% Y/Y increase in selling, general and administrative expenses (S, G & A). The increase in the S, G &A expenses is primarily due to intense competition in the cloud marketing software sector.
Relative Stock Valuation
We look at the company’s current valuation vis-à-vis its industry competitors. The table below compares the current LTM price-to-sales (P/S) valuation multiples of Responsys Inc. against Constant Contact (NASDAQ:CTCT) and Marin software (NYSE:MRIN).
|LTM revenue ($ millions)||Market Cap (Dec 20, 2013)||PS ratio||YoY revenue growth|
|Constant Contact (NASDAQ:CTCT)||276.75||938.24||3.39||13.7%|
|Marin Software (NYSE:MRIN)||72.54||327.29||4.51||30.6%|
|Responsys Inc. (MKTG)||194.33||1,410||7.26||25.1%|
From the above table we can see that the company is clearly expensive at its current valuation levels. Considering the current growth rate, Responsys should have enjoyed a P/S multiple in the range of 3.4 to 4.5. The company had a P/S multiple of 5.16 on December 19th 2013, the day before the buyout was announced. However Oracle valued the company at $27 which was 38% higher than the already expensive price levels at which MKTG stock was trading.
Using a valuation multiple of 4.5x, Responsys Inc. would be valued at $874 million or $17.01 per share. Oracle Corp’s $27 per share value is significantly higher and this is due to synergy which will result from the acquisition. Oracle Corp’s larger sales force could expand the reach of Responsys Inc.’s current products, therefore increasing the revenues from the acquired segment.
The shareholders of Oracle Corp did not seem happy with the premium paid for the acquisition which was reflected in the marginal dip in the company’s stock price during the regular trading session on 20 Dec, 2013. On the other hand the acquisition resulted in over 40% one day gains for the shareholders of Responsys, as the price moved up to match the offer price of Oracle Corp. While the premium pricing is yet to be justified, we believe that Oracle Corp will be able to scale up the operations of the acquired segment to profitable and stable levels over the coming quarters.