Oracle Buys Acme Packet To Move Deeper Into Core Telecom

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1 The Intelligent Edge Oracle Buys Acme Packet To Move Deeper Into Core Telecom Oracle s acquisition of Acme Packet, a leading provider of session border controllers to service providers and enterprises, will establish Oracle as strategic vendor of core telecom infrastructure and position it as a key enabler of IP-based unified communications applications for enterprises. On February 4, Oracle announced its intent to acquire Acme Packet for $2.1 billion ($1.7 billion net of Acme s cash), which equates to fairly rich trailing EV/Sales multiple of 6x. Acme Packet is the leading provider of session border controllers (SBCs) solutions that are used at the perimeter of an IP-based network to control call admission in addition to performing a host of critical signaling and media control functions. The Company serves more than 1,900 customers, consisting of fixed line, cable, wireless and over-the-top service providers as well as enterprises and government institutions. Its solutions are expected to become core offerings within Oracle s communications industry solution portfolio. Many analysts and industry observers have been confused by this acquisition, but we believe Oracle s strategic rationale is sound and its timing seems prescient. Service providers are poised to migrate the majority of their circuit-based voice traffic to IP-based networks concomitant with their upgrades to next generation architectures, such as VoLTE. The migration to IP-based voice technologies facilitates the disaggregation of the proprietary, siloed circuit-switched voice networks in favor of more open and modular environments. We believe this opens the door for IT stack vendors like Oracle, which have historically operated at the periphery of telecom space, to play a much larger role in the core telecom network going forward. Hermes Capital Advisors 1 February 20, 2013

2 Background SBCs enable the secure and reliable operation of IP networks through extensive protocol internetworking and normalization, advanced management of packet throughput and traffic analysis. Moreover, SBCs provide many essential security functions within a service provider s IP network: Act as a network address translator (NAT) for a service provider Act as a firewall or cooperate with thirdparty firewalls in the DMZ (enabling VoIP signaling and media to pass through) Hide a service provider s network topology to prevent customers or other carriers from learning how its network is configured Provide call admission control, which can protect a service provider from DoS attacks as well as assisting in providing desired service levels to customers In addition to security, SBCs provide key media gateway and service enabling functions: Reserve service provider network resources to handle calls being set up, and ensure sufficient bandwidth is available for prioritized services Media bridging and signaling protocol interworking Providing fault-tolerance to ensure % availability Tracking the progress of each call for the purposes of billing and call detail record (CDR reporting). Context SBCs are key enablers of communications internetworking and occupy highly strategic real estate in IP networks SBCs provide essential network control and intelligence functions that overlay IP transport networks that enable secure, prioritized, and trusted delivery of voice, data, video and unified communications. These functions benefit service providers in multiple ways: Develop and monetize communication services through differentiated levels of security, reliability and quality Enable deployment of new services faster, with less complexity and at lower cost Enable network interoperability to meet availability and quality of service demands The transition to all IP networks enables IT vendors to play greater role in core telecom Service providers are transitioning towards all IP-based networks and services as well as leveraging open service platforms like IMS (IP Multimedia Subsystems) rather than proprietary telco-based offerings. In the past, it was necessary to design proprietary systems to meet the extremely high service levels mandated for circuit-switched voice equipment in the telecom space. The result was monolithic, closed network architectures. In contrast, open IP-based frameworks like IMS specify or provide standard interfaces for service creation, execution, charging and network management, which facilitates disaggregation of proprietary siloed telecom architectures to a horizontal framework where the services plane, control plane, and core transport plane are logically separated. We believe this will break the virtual stronghold that legacy telecom infrastructure vendors have had on the service layer and session control layer functions within carrier networks. The logical separation of applications and services from the underlying transport network and the growing use of modular, ITstyle tools opens the door for traditional enterprise stack vendors like Oracle, IBM, Cisco and Microsoft which have historically operated at the periphery of the telecom space to play a much more significant role in core telecom networks going forward. Hermes Capital Advisors 2

3 SBCs are poised to play a larger role in the enterprise and are highly complementary to Oracle s middleware offering, in our view For instance, we view Acme Packet s Net-Net Application Session Controller (ASC) as an advanced middleware platform that enables enterprises to communications-enable business processes and applications. We think this is highly complementary to Oracle s Fusion platform and believe there are multiple compelling use cases for integrating IP communication services (e.g., voice, video, messaging and multimedia) with Oracle s enterprise applications: Add voice communications to CRM, salesforce automation, and/or help desk solutions to enhance customer interactions and boost sales and support Add click-to-talk or click-to-chat features to customer-facing web pages to improve sales and customer service Incorporate location-based and presencebased communications into internal business processes to improve collaboration In the case of Acme Packet however, Oracle is moving deeper into the telecom core than it has previously ventured. While this acquisition has confounded most analysts and industry observers, we think it is a prescient move and demonstrates considerable foresight on Oracle s part. Service providers are poised to migrate the majority of their circuit-based voice traffic to IP-based networks concomitant with their upgrades to next generation architectures, such as VoLTE. In doing so, they will leverage open platforms rather than closed, proprietary offerings that characterized circuit-switched networks. We think this opens the door for enterprise stack vendors like Oracle, which have historically operated at the periphery of telecom space, to play a much larger role in the core telecom network going forward. With its acquisition of Acme Packet, Oracle may just have secured a strong first-mover advantage versus its IT platform rivals. Conclusion Oracle has a long history of telecom-oriented M&A and, in our view, has demonstrated considerable foresight in entering communications infrastructure market segments. The Company has utilized a thoughtful acquisitions strategy to build a comprehensive communications software vertical offering around its database and ERP/CRM platforms, which consists of business operations solutions (e.g., billing, CRM, ERP, order management, analytics, etc.), service operations (e.g., inventory, activation, service delivery, charging and network intelligence) and user applications. Hermes Capital Advisors 3

4 About The Intelligent Edge The Intelligent Edge is a source of proprietary insights from Hermes Capital Advisors that are designed to help business leaders make sense of and capitalize on emerging trends in the technology sector. Our original analysis is focused on disruptive IT trends and cutting edge technologies where we believe the strategic opportunities for our clients are greatest. We explore these trends in a broader financial context by analyzing the implications of related company financings, M&A and valuation trends. We are dedicated to empowering our clients with proprietary strategic and financial insights that will give them an intelligent competitive edge. About Hermes Capital Advisors Hermes Capital Advisors, a division of Arcadia Securities, is an independent investment bank focused on assisting early stage through middle market companies in the technology sector capitalize on their highest value growth and financial opportunities. The firm offers a variety of capital raising and strategic and financial advisory services in connection with mergers and acquisitions, private placements, valuations, and fairness opinions. For more information about our firm and the services we provide, please visit our website at Hermes Capital Advisors 4

5 Disclaimers The information and opinions in this report were prepared by Hermes Capital Advisors, LLC ( Hermes ). It has not been prepared as a research report; as such term is defined by applicable law and regulations, and is intended to be used solely for informational purposes. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities and has not been developed with the intent to endorse any particular trading strategy or investment objective. Hermes and/or its affiliates may act as advisers to, have positions in and effect transactions in securities of companies mentioned herein and also may provide, may have provided, or may seek to provide investment banking services for those companies. In addition, Hermes and/or its affiliates or their respective officers, directors and employees may hold long or short positions in the securities, including underlying option contracts in or other related financial products of companies discussed herein. Any opinions or projections in this report should be considered solely as such and are subject to change without notice. The financial instruments discussed herein may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. Further, past performance is not necessarily indicative of future results. The information contained herein is believed by Hermes to have been obtained from reliable sources; however, Hermes makes no representation as to the accuracy or completeness of such information. Investment banking services are provided by Arcadia Securities, LLC, a registered broker-dealer and member of FINRA and SIPC. Copyright 2012 Hermes Capital Advisors, LLC. All rights reserved. Hermes Capital Advisors 5