What Oracle's Ellison Sees in Hurd [Updated]

(UPDATED: See below.)
How smart is Oracle's Larry Ellison? While the rest of the business world was caught up in the smokescreen of Mark Hurd's supposed sex scandal, Ellison saw and seized an opportunity to get a $5 billion pop in his stock price. Beyond the short-term, he gets the ideal executive for Oracle as his corporation makes the transition to keep up with the fluid IT world where software and hardware companies are becoming indistinguishable. For every reason that Hurd turned out to be bad for H-P, he's probably perfect for Oracle.

In the very short period between Hewlett-Packard's bungled exit strategy, Hurd had become one of the most sought after executives. He cost H-P $14 billion in market cap, add the boost Oracle received this morning and Hurd becomes a $19-billion guy. No wonder there's been talk of intense interest in Hurd from private equity shops and public companies like Dell. As an operator, Wall Street clearly believes in him.

Of course, Joe Nocera made the excellent case that Hurd's defenestration from H-P was all about his having hit a wall with the legendary Silicon Valley firm. Nocera painted a picture of a brutal, selfish manager with no strategic vision who rode H-P hard and put it away wet. He cut costs and rewarded himself for the effort.

TheStreet.com's Eric Jackson was the first to point out the troubling pattern of rising pay for Hurd and his close cohort of managers even as the company's growth flattened off. Looking at Jackson's numbers, its hard not to come to the conclusion that Hurd was buying off his direct reports. Their pay rose dramatically in 2008 by greater percentages than even his own. Even though his 74% pay rise netted him $43 million,one of his underlings had to get a five-fold increase in pay just to make two-thirds of Hurd's compensation.

From what we saw after Hurd's fall, the payoffs didn't work. Even in a world where it is rare to see EVPs make half of what the boss makes, there was no love lost between Hurd and his team.

So why should Ellison think that Oracle will be different? The key lies in that ill-defined idea of corporate culture. It's not just a tolerance for unconventional personal lives. Though, obviously, Ellison has a higher tolerance for messy personal lives what with out-going co-President Charles Phillips having survived his own sex scandal.

A lack of interest in the titillating is hardly what defines Ellison. Instead it's the emphasis on acquisitions to grow and transform his company. H-P is still smarting from its loss of identity as an engineer's company. It now looks to acquisitions for growth. This doesn't make H-P any different from its main rivals -- indeed, it's fitting that H-P should win a bruising bidding war the week before Hurd's new job was announced -- but the company is suffering through the last stages of a transition that every other firm already accepted.

One of the signal moments in IBM's transition from an insular company into the 21st century mode of tech firms was its 2002 purchase of PriceWaterhouseCoopers consulting business. When H-P bought EDS, it was making the same move but somewhere inside the corporation the idea of defending the old H-P -- a we-make-it-best-here engineering firm that develops new products itself -- still lived on.

That would have been hard with Hurd's meager R&D budget that fell from 9% to less than 2% of revenues. But even at Oracle, where that number is around 13%, the company recognizes that growth comes through acquisitions. Except Oracle's idea of acquisitions is to buy companies that are cheap and can be repurposed for Oracle's needs.

Indeed, Oracle's prowess at acquisitions is something Phillips even crowed about it when he claimed in 2008 that "We've become the IPO market for the enterprise software industry." That Phillips, a former analyst, may not have fulfilled his ambitions at Oracle is somewhat confirmed by his being replaced by Hurd. Ellison clearly wanted someone who could be the face of his acquisitions strategy, a role that Phillips was having trouble inhabiting.

That's where hiring Hurd makes so much sense for Ellison. The Oracle founder isn't a conventional thinker and he's not terribly worried about what other people think. He's got strategic and tactical vision to spare. With a half a decade under his wing at a company three times Oracle's size, Ellison gets visibility and credibility for his growth plans.

More than anything, Hurd's hiring confirms that Ellison is not at all satisfied with where Oracle is. At a time when many founders would be engaged in their hobbies or looking forward to building philanthropic monuments, Ellison has made it clear that Oracle is fully committed to whatever transition lies ahead for the firm. With Hurd he buys the future.

Ellison doesn't mind a combative environment. He and his company thrive on it. Hiring Hurd, he gets a superlative operations guy who won't upset his company's culture one bit. Most important to the whole Hurd soap opera is the fact that Ellison still owns so much of the company (23%) that there's no worry of a nervous and fractious board panicking.

Maybe that's why Goldman Sachs added Oracle to its Conviction Buy List on the news of Hurd's hiring. They see Hurd as a catcher who will integrate and operate Ellison's acquisitions. As Oracle moves into the same areas that H-P already operates in, Hurd knows the customers, understands the markets and is happy to beat down costs.

Hurd fits so well into Oracle, the wonder of this move isn't that Ellison is doing it, it's that Ellison is getting the opportunity to hire him at all.

Update: To no one's surprise, Hewlett-Packard has filed a pre-emptive civil suit suggesting that Hurd cannot perform his new job -- or, at least, it would have been nice if Hurd had told them about his new job -- without violating some aspect of his agreement not to reveal H-P's trade secrets.
The suit isn't very impressive. It's another indictment of H-P's board and its decision making but you can read the civil complaint (this is a downloadable pdf: hphurdsuit09072010) and decide for yourself.