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Oh wow - gotta wonder how this "arms length transaction" got past any internal auditors or technology officers, or if no one was looking. (Then again, did Citib

Oh wow - gotta wonder how this "arms length transaction" got past any internal auditors or technology officers, or if no one was looking. (Then again, did Citibank have a CTO in the 90s?) Citibank developing in-house software then selling it to Oracle so that they can charge recurring licensing and support fees for eternity is incredibly short-sighted if you're Citibank or Manna from heaven if you're Oracle. My guess though is the Citibank executives who signed off on this got promoted up and out of the department that has to budget for these licensing fees and support costs, and on both sides they received tidy bonuses for "increasing revenues".

dagmx 6y ago
The software fees are likely reduced/free. I've worked at companies that have sold in house software to other companies to make them public. It's usually resulted in lowering in house maintenance costs and the licensing agreements have a sweetheart deal for the original company. Usually it's a win win, unless you value keeping control (which can be quite valuable)
- wegs 6y ago
  > Usually it's a win win, unless you value keeping control (which can be quite valuable) My experience is that it's usually overvalued. An external, focused company will usually do a better job than an internal project. It's emotionally hard to give up control, but successful companies tend to focus on a few things, do them really well (areas of competitive advantage), and outsource everything else. A best-of-breed external solution almost always beats an in-house solution. I'd just never do something like this with Oracle. Their business model seems to consist of locking companies in, and then milking them.
AmericanChopper 6y ago
Why would the arms length principle be a concern here? It’s generally only a concern in regards to transfer pricing of transactions between entities that have common ownership/control.
skissane 6y ago
> My guess though is the Citibank executives who signed off on this got promoted up and out of the department that has to budget for these licensing fees and support costs, and on both sides they received tidy bonuses for "increasing revenues". Oracle paid Citibank over US$500 million for this company. There is no way a transaction that big isn't being approved by the CEO and board of directors of both firms. It wouldn't be under the control of the software licensing department. It would be controlled by the business development group in charge of M&As and divestments. > Citibank developing in-house software then selling it to Oracle so that they can charge recurring licensing and support fees for eternity is incredibly short-sighted if you're Citibank or Manna from heaven if you're Oracle. I have no internal info on the details of the Citibank-Oracle relationship (my role at Oracle was technical, not the kind of role where I would know that kind of business relationship stuff, and I never worked on the Citibank account either.) But, as @dagmx has already pointed out, I think it is highly likely due to the history of this software that Citibank has some kind of special licensing deal with Oracle which protects them against that sort of thing.
- michaelt 6y ago
  > Oracle paid Citibank over US$500 million for this company. Maybe they saved the US$500 million they were paid for this software, and they can use it to cover the US$500 million it just cost them.
- avar 6y ago
  Even if AaronFriel's assertion is true and they received no special deal, it's a naïve view of corporate governance and SAAS v.s. in-house devleopment to say that (as an example) if their license fee was high enough that they'd start incurring a net loss in 10-15 years that they made the wrong move. For Citibank that was US$500 million then, which they could either invest directly or return to investors. The opportunity cost of that cash has to be factored in. It's also an a large ongoing liability to have a sizable in-house development effort when it's not your main business. Departments need to be staffed and run, business plans made etc. For all of Oracle's flaws they're presumably going to have an incentive to improve the software, and more capital with which to do so from clients other than Citibank. For obvious reasons other banks would be more inclined to buy from Oracle than a direct competitor. There's also often tax reasons for why it's preferable to buy a service v.s. maintain in-house software, and naïve back of the envelope math usually doesn't account for that.

dagmx 6y ago

The software fees are likely reduced/free. I've worked at companies that have sold in house software to other companies to make them public. It's usually resulted in lowering in house maintenance costs and the licensing agreements have a sweetheart deal for the original company. Usually it's a win win, unless you value keeping control (which can be quite valuable)

wegs 6y ago
> Usually it's a win win, unless you value keeping control (which can be quite valuable) My experience is that it's usually overvalued. An external, focused company will usually do a better job than an internal project. It's emotionally hard to give up control, but successful companies tend to focus on a few things, do them really well (areas of competitive advantage), and outsource everything else. A best-of-breed external solution almost always beats an in-house solution. I'd just never do something like this with Oracle. Their business model seems to consist of locking companies in, and then milking them.

AmericanChopper 6y ago

Why would the arms length principle be a concern here? It’s generally only a concern in regards to transfer pricing of transactions between entities that have common ownership/control.

skissane 6y ago

> My guess though is the Citibank executives who signed off on this got promoted up and out of the department that has to budget for these licensing fees and support costs, and on both sides they received tidy bonuses for "increasing revenues". Oracle paid Citibank over US$500 million for this company. There is no way a transaction that big isn't being approved by the CEO and board of directors of both firms. It wouldn't be under the control of the software licensing department. It would be controlled by the business development group in charge of M&As and divestments. > Citibank developing in-house software then selling it to Oracle so that they can charge recurring licensing and support fees for eternity is incredibly short-sighted if you're Citibank or Manna from heaven if you're Oracle. I have no internal info on the details of the Citibank-Oracle relationship (my role at Oracle was technical, not the kind of role where I would know that kind of business relationship stuff, and I never worked on the Citibank account either.) But, as @dagmx has already pointed out, I think it is highly likely due to the history of this software that Citibank has some kind of special licensing deal with Oracle which protects them against that sort of thing.

michaelt 6y ago
> Oracle paid Citibank over US$500 million for this company. Maybe they saved the US$500 million they were paid for this software, and they can use it to cover the US$500 million it just cost them.
avar 6y ago
Even if AaronFriel's assertion is true and they received no special deal, it's a naïve view of corporate governance and SAAS v.s. in-house devleopment to say that (as an example) if their license fee was high enough that they'd start incurring a net loss in 10-15 years that they made the wrong move. For Citibank that was US$500 million then, which they could either invest directly or return to investors. The opportunity cost of that cash has to be factored in. It's also an a large ongoing liability to have a sizable in-house development effort when it's not your main business. Departments need to be staffed and run, business plans made etc. For all of Oracle's flaws they're presumably going to have an incentive to improve the software, and more capital with which to do so from clients other than Citibank. For obvious reasons other banks would be more inclined to buy from Oracle than a direct competitor. There's also often tax reasons for why it's preferable to buy a service v.s. maintain in-house software, and naïve back of the envelope math usually doesn't account for that.