Tickers in this Article: ORCL, FFIV, APKT, ERIC, VZ
Oracle (Nasdaq:ORCL) doesn't do things halfway, and when the company announced its acquisition of Acme Packet (Nasdaq:APKT) it looked like only the beginning of the company's strategy to exploit the large telecom vertical. Now we know that the company really is serious, as it has followed the Acme Packet deal with an announcement that it intends to acquire networking vendor Tekelec from its private equity owners.

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A Complimentary Deal With Interesting IP Ramifications
Right off the bat, acquiring Tekelec makes quite a bit of sense. Tekelec is a telecom equipment vendor that specializes in products that handle mobile traffic. In particular, the company focuses on areas like network signaling, policy control, and subscriber data management. Combined with Acme Packet's network control products/technology, Oracle will offer a cohesive hardware/software line-up in network control for large carrier customers like Verizon (NYSE:VZ) and AT&T (NYSE:T).

I'm particularly interested in Tekelec's Diameter signaling technology. Diameter signaling handles authentication, authorization, and accounting functions and works in tandem with Session Initiation Protocol (SIP) when a subscriber uses a mobile network. Because of the data features of smartphones, they generate a lot more Diameter activity, and Diameter is going to be key in 4G/LTE networks. In particular, Diameter is going to be vital as tiered or shared mobile data plans take off.

While Acme has been making good progress in Diameter, Tekelec looks like the market leader at this point. F5 (Nasdaq:FFIV) has been looking to move into this market, and this move towards a more unified platform in network control is definitely something that large telecom vendors like Huawei, Nokia Siemens, and Ericsson (Nasdaq:ERIC) are going to notice.

I think it would be a mistake to just look at Tekelec for its Diameter and other present day assets. Tekelec has some pretty substantial networking IP that is just waiting to be better exploited. Now, Oracle's history of taking the ball and running with it after an acquisition is far from perfect (particularly in the case of hardware assets), but if Oracle gets this right, the Tekelec IP assets could ultimately be worth quite a lot and lead to an even stronger position in the market.

SEE: Analyzing An Acquisition Announcement

Details Are Hazy, But Arguably Not Terribly Relevant
Unfortunately, Oracle has not yet given much detail about this proposed transaction. Tekelec was taken private back in November of 2011 at an enterprise value of nearly $800 million. Since then, proxy materials and industry research estimates have pegged the company's 2012 revenue in the neighborhood of $350 million to $400 million.

While Oracle is intending to pay more than 6x sales for Acme Packet, the Tekelec deal is unlikely to carry a valuation anywhere close to that. Instead, most analysts are projecting EV/Revenue multiples in the neighborhood of 1x to 2.5x for this deal. A key question may be how much cash at Tekelec Oracle is taking with it, but I'd be surprised if the deal value is very far north of $1 billion.

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The Bottom Line
Even with a recent earnings disappointment, I am relatively bullish on Oracle shares. While Oracle has had its ups and downs with hardware, I think the telecom equipment market is ripe for a recovery, and I don't think companies like Huawei and Ericsson are quite ready for what Oracle is capable of doing to a market. I'm certain that there will be ups and downs as Oracle integrates Acme Packet and Tekelec with its own products, and I'm certainly willing to acknowledge the risk that they fumble this opportunity in a significant way.

Even so, I like this deal and I believe it makes strategic sense, particularly given what I believe to be a reasonable price. Below $40 a share, I'd still be very interested in Oracle shares and may well add them to my own portfolio.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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