Oracle Buys Pillar

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One of the richest people in the world, Larry Allison, 66, is in an uncomfortable position, being owner of acquired Pillar and CEO of buyer Oracle. We suspect that some US law firms will be happy to investigate for filing a shareholder class action lawsuit. Why he didn't launch a storage subsystem activity directly into Oracle before the acquisition of Sun? Hoping to get a large ROI on Pillar for himself, not for Oracle? Why Oracle is acquiring Pillar only now?

Formerly Digital Appliance Storage Systems Israel, Pillar Data Systems was created in July 2001 by Tako Ventures LLC, a private equity owned by Oracle's CEO, director and largest stockholder (around 23%) Larry Ellison, that owns 85% of Pillar, the remaining being in the hands of employees. Tako invests at least $400 million and probably more in the storage firm. "As of June 29, 2011, Pillar Data owed Mr. Ellison and his affiliates a total principal loan amount plus interest of approximately $544 million for amounts borrowed by Pillar Data in prior years", was written in a most recent Oracle's SEC filing on the acquisition. In just ten years, it's the biggest sum ever put in a storage start-up, the second place being occupied by defunct StorageNetworks and Sanrise with - only - $205 million and $203 million, respectively. The amount of funding raised by a company is rarely in relation with its success.

Pillar is definitively a failure. Its CEO Mike Workman told us last September that annual revenues were $50 million and that his company never was profitable. Today Oracle said that Pillar has 600 customers running approximately 1,500 systems. At the time we met Workman, he spoke about 555 customers for 1,600 systems installed with an average capacity of approximately 60TB and an average price of around $140,000, hardware and software included, without third-party products. In ten years, it corresponds to a mere five new customers par month. But, in fact, Pillar began to sell its storage subsystems around October 2005.

The San Jose, CA-based company invested a lot in sales and marketing when its first products were released, notably in Europe where its team grew from four to over 50 people. But it was too costly. In November 2008, we learned that Pillar terminated 150 employees or 30% of its personnel. The last figure is 325 people as published on the company's web site. During the interview with Workman, at the question: "What's Ellison's ultimate goal, to sell the company? IPO?", he answered: "Plan A has always been to go public."

It will never happen. Last years Pillar was hoping to find a buyer, but it could be only a big one to try to receive at least the investment already spent in the start-up. But at the end, Dell preferred Compellent and EqualLogic, HP opted for Lefthand Networks and 3par, and EMC for Isilon. IBM and HDS do not need to add a new line of SANs. When Pillar was founded, its technology was really interesting but today is not a real breakthrough. And it would be impossible to file a successful IPO with such a limited number of customers and no profitability. It's the end of the dream of Larry Ellison, a guy who likes storage about as much at databases.

Pillar Axiom storage subsystems will complete the Oracle's storage portfolio with Exadata for OLTP, data warehousing, and database consolidation, ZFS appliances mainly for NAS I/O, and high-end tapes for archiving. Formerly Sun traditionally resold third-party products for SAN, including Hitachi and LSI.

To avoid critics like "Larry Ellison Sells A Company to Himself", a title already seen on the Web, Oracle built a complicated deal based on 'earn-out'. This term is used when small companies in high-tech are sold. The acquirer typically pays a part of the purchase price up front with the remaining structured as an earn-out and paid out over time as the acquired company achieves certain levels of sales or profitability.

Here is some precisions of the Oracle's earn-out from the SEC filing:
"We entered into an agreement and plan of merger dated as of June 29, 2011, with Panther Acquisition Corporation and Pillar Data, pursuant to which we will acquire all of the issued and outstanding equity interests of Pillar Data in exchange for rights to receive contingent cash merger consideration, i.e. an 'earn-out,' as described below and subject to certain conditions. As a result, we will not make any upfront payments to Pillar Data or any Pillar Data stockholders, including Mr. Ellison, or option holders upon the closing of the acquisition.
"As of June 29, 2011, Pillar Data owed Mr. Ellison and his affiliates a total principal loan amount plus interest of approximately $544 million for amounts borrowed by Pillar Data in prior years. Immediately prior to the closing of the acquisition, the then outstanding amount of the Pillar data loan will be converted into shares of preferred stock of Pillar Data which will have a right to dividends accruing at an annual rate of 1.5%. Mr. Ellison directly and indirectly will also beneficially own 55% of the fully diluted shares of common stock of Pillar Data immediately prior to the closing.
"In accordance with the merger agreement, Mr. Ellison and the other stockholders and the option holders of Pillar Data shall receive the earn-out, if any, on or before November 30, 2014 (assuming the transaction closes on or before August 31, 2011), which is 90 days following the completion of twelve full fiscal quarters of Oracle following the closing date of this transaction (the earn-out period). The earn-out will be calculated based on a 3x multiple of certain future revenues of Pillar Data which will be reduced for certain future costs and other losses of Pillar Data. Our obligation to pay the earn-out will be subject to reduction as a result of our right to set-off the amount of any indemnification claims we may have under the merger agreement.
"The earn-out therefore will only be paid to Mr. Ellison, his affiliates and, if applicable, to the other Pillar Data stockholders and option holders if the net revenues during year 3 of the earn-out period exceed the net losses, if any, during the entire earn-out period."

Both Pillar's chairman and CEO Mike Workman and president and COO Nancy Holleran will be joining Oracle.

We received the two comments on this acquisition:
From Drobo's CEO Tom Buiocchin: "The Pillar acquisition reflects the end of the Storage 2.0 era which featured groundbreaking innovations in storage designed for the largest of enterprises in terms of features and price. The next wave of storage innovation will be about bringing similar innovation, but coupled with supreme ease of use and unprecedented affordability, to the small and mid-size market. (...) We believe that legacy storage systems in particular, the likes of which are often rooted in 25 year-old technology, face a very limited future in the Storage 3.0 wave."
From Nexenta CEO Evan Powell: "Pillar's demise is due to a legacy business model that is so wasteful of capital investment that it threatened to put a dent in the enormous fortune of their brilliant primary investor, Larry Ellison. In approximately half the time and with less than one tenth the capital invested, Nexenta has achieved twice the number of commercial deployments as Pillar ever did. Pillar may be the last of the big bets on do it all, vertically integrated, proprietary storage start-ups. The model has been trumped by more open approaches."