With Cerner, Oracle buys into an industry that is actively embracing cloud and outpacing total GDP growth

A deal would indicate revenue potential, but the evolving competitive and technology landscapes raise questions

On Dec. 20, 2021, Oracle (NYSE: ORCL) announced plans to acquire Cerner (Nasdaq: CERN), a front-runner in the healthcare IT (HCIT) industry, for $28.3 billion. The announcement comes as COVID-19 continues to strain global healthcare systems, driving up demand for digitized workflows and processes that can help improve efficiency, enhance service quality and reduce costs. The announcement also comes as Oracle faces a turning point: After six consecutive quarters of corporate year-to-year revenue gains, net-new buyers, not just those inside the Oracle ecosystem, are showing interest in the company’s feature-rich suite of back-office applications and second-generation cloud infrastructure.

As such, by drawing on some of the successes of its previous acquisitions, including Peoplesoft and NetSuite, Oracle hopes to use Cerner, whose business has similarly been on an upward trajectory, to enter a new phase of growth that is more on par with the 30%-plus growth rates recorded by competitors Amazon Web Services (AWS) (Nasdaq: AMZN), Microsoft (Nasdaq: MSFT), and Google Cloud (Nasdaq: GOOGL). Should the deal close, this growth could stem from multiple areas, including onboarding electronic medical record (EMR) and electronic health record (EHR) workloads to Oracle Cloud Infrastructure (OCI), and using AI services like Oracle Assistant to kickstart conversations with the clinical, operational and financial branches of healthcare in a land-and-expand approach.

Despite the growth potential, investors appear skeptical, with Oracle’s stock price falling 5% on the day of the announcement, largely due to concerns around the company’s cash standing and ability to position Cerner as a more notable alternative to Epic and other competing HCIT firms. In some ways, this skepticism stems from Oracle’s lack of comparative experience in the industry cloud space and, perhaps to a larger extent, investors see the acquisition as another one of Oracle’s attempts to buy revenue, similar to the company’s failed TikTok deal and subsequent fallout.

Regardless, Oracle’s biggest challenges stem from the evolving technology landscape that is actively favoring not only the cloud but also open, hybrid multicloud delivery methods. Oracle plans to use Cerner to bolster its cloud position, but given the company’s later-to-market standing and perception for locking customers in, it is unclear the extent to which Cerner will actively support Oracle’s cloud vision. Furthermore, competitors, including those with deeper pockets and arguably more open partner ecosystems, only add to this skepticism.

Cerner would be the largest buyout in Oracle history, but valuation is reasonable

After the announcement, sticker shock was inevitable, as the deal came at a price tag in line with some of the largest acquisitions in software history, including Microsoft’s purchase of LinkedIn and IBM’s purchase of Red Hat. However, based on Cerner’s 2020 and projected 2021 financial results, Oracle valued the deal at roughly 5x Cerner’s annual revenue, a level that is typical in industry acquisitions, especially those that include firms with more transactional business models. COVID-19’s halt on upfront spending impacted Cerner’s license business and overall revenue growth in 2020, but the company has quickly bounced back in 2021 and is expected to meet its annual revenue guidance of 5% year-to-year growth.

A key part of Cerner’s strategy has been accelerating organic top-line growth through platform modernization and emphasizing SaaS-like delivery methods. This approach aligns with Oracle’s strategy, which similarly emphasizes revenue growth through annuity-based cloud services. Another priority for Oracle is gaining share through OCI, which will be a difficult feat given the highly saturated nature of the IaaS market. Oracle will help Cerner overcome challenges entering global markets, especially in an unpredictable industry like healthcare, to meet its growth objectives.

Although Cerner management boasts leading market share in many markets outside the U.S., in the U.S. EHR space, the company currently sits at about 25% market share and is losing out to Epic, which is nearing an estimated 30% market share. As such, Cerner’s, and Oracle’s, biggest opportunities could come internationally. Oracle will play a key role in helping Cerner, which currently derives 89% of its revenue from domestic customers, expand its international presence.