Oracle Corp plans to buy Taleo Corp, a maker of Web-based software for recruiting employees, for about $1.9 billion as a war heats up for control over the fast-growing cloud computing market.

It is the latest big investment in cloud computing by Oracle, the world's No. 2 maker of business management software after Germany's SAP. While Oracle is behind SAP when it comes to selling traditional software that customers install on their computer systems, its billionaire CEO Larry Ellison has been more aggressive in adding cloud-based software offerings over the past few years.

They are both trying to catch up with cloud leader Salesforce.com Inc, which was started over a decade ago by former Oracle executive Marc Benioff. Ellison was an early investor but Benioff fired him from the board when he felt Oracle got too aggressive in competing with the firm.

Cloud computing refers to providing software, storage, computing power and other services to customers from remote data centers over the web. Demand for cloud-based software is rising rapidly because the approach allows companies to use new programs faster and at lower costs than traditional products that are installed at a customer's own data center.

Last year, Oracle introduced web-based versions of several of its new line of business management software programs known as Fusion Apps, which analysts say is still in the early stages of winning market acceptance.

Last month it paid $1.5 billion purchase for established cloud player RightNow Technologies, whose software helps companies provide customer service.

In December, SAP, which has a smaller set of cloud offerings, said it will buy cloud human-resources software maker SuccessFactors Inc for $3.4 billion to jump start its expansion into the hot sector.

Still, it is early days for Oracle and SAP when it comes to cloud computing. Analysts say that many corporate technology buyers are skeptical that home-brewed cloud products from Oracle and SAP will hold up against proven products from pioneers like Salesforce.com.

SAP and Oracle are still perceived as the old guard on premise and they are not 'with it' in cloud, said Nomura Securities analyst Rick Sherlund. They want to own this space. They want to reinvent themselves for the cloud.... They are buying a position in the cloud through consolidation.

PLUGGING HOLES

Analysts said Oracle's Fusion Apps cloud products already provide a fairly broad array of business management programs, which means that it is under less pressure to buy companies to build out its portfolio than SAP, which has fewer web-based offerings.

Taleo fills one of the few obvious gaps in Oracle's offering, said Morgan Keegan analyst Michael Nemeroff.

They did not have a recruitment package. They always needed to develop or buy it and now they have done it, he said.

Last month, Oracle filled another hole with its $1.5 billion purchase of RightNow Technologies: web-based software for handling customer service.

Nemeroff said that Oracle may still be looking to purchase a company that provides web-based payroll software, such as one Ultimate Software Group Inc. Officials with Oracle declined comment.

SAP spokesman Jim Dever said that his company would discuss its strategy for expanding its cloud offerings in several weeks, after the close of the SuccessFactors deal.

The Taleo deal value of $46 a share offers an 18 percent premium to Taleo's Wednesday close of $38.94.

Taleo shares surged 17 percent on Thursday as the Nasdaq Composite Index was flat.

Other makers of cloud-based software rose only moderately amid expectations that Oracle and SAP will be selective in making any acquisitions.

Cornerstone OnDemand Inc's stock rose 1.8 percent to $18.10. Kenexa Corp climbed 2.5 percent to $28.82, while Ultimate Software Group rose 1.2 percent to $66.82.

(Reporting by Jim Finkle in Boston and Sayantani Ghosh in Bangalore; Editing by Joyjeet Das and Derek Caney)

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