How that Oracle and Pillar earn-out really works

Comment Pillar investors will only receive cash from Oracle for the Pillar acquisition if Pillar revenues in 2014 exceed net losses from 2011 to 2014.

The acquisition is structured so Oracle boss Larry Ellison's half billion dollar loan to Pillar is turned into preferred stock with other investors holding common stock. Larry gets 1.5 per cent dividend interest a year on his preferred stock. He will also own directly and indirectly 55 per cent of the fully diluted common stock.

Investors will receive a cash payment on or before November 30, 2014, if Pillar revenues perform in a particular way during a three-year earn-out period before that.

This period runs from the acquisition close to the end of July 2014. The investors will receive cash if Pillar's Axiom product-related net revenues in the third and final year of the earn-out period exceed Pillar's net losses, if any, in the full three-year earn-out period. Any cash payment will be three times the difference between these two numbers.

Specifically the earn-out will only be paid to Larry, his affiliates and, if applicable, to the other Pillar Data stockholders and option holders if the net revenues during year three of the earn-out period exceed the net losses, if any, during the entire earn-out period.

If Pillar earns $200m net in the last four quarters of the earn-out period and its net losses in the 3-year earn-out period are $100m then Larry and the other investors get 3 X ($200m - $100m) = $300m.

Larry gets paid first too, since he owns preferred stock.

Pillar needs a turnaround

Oracle is not formally bound to pay the Pillar investors anything. Pillar CEO Mike Workman – we assume he is an investor – and others will only get cash if they manage things, bearing in mind that "the operation and management of the Pillar Data business during the Earn-Out Period will be in the sole and absolute discretion of Oracle" – so that Pillar earn-out year-three net revenues are greater than the net losses in all three years of the earn-out period.

Pillar CEO Mike Workman

The Pillar business unit management, in effect Pillar's current executive management, has to turn the company around. It has two years to get the product line into a position where it can sell the hell out of it the following year and earn big bucks.

There's a balance to be struck between the costs of developing, improving and extending the Axiom product line and the sales revenues from doing so. Just throwing money at Axiom research and development won't cut it.

Oracle itself is not duty-bound to pay anything to Pillar stock holders; everything depends on Pillar's executive management, now reporting, we assume, to Oracle EVP John Fowler, taking advantage of Oracle's resources and channels to fashion HP EVA, NetApp FAS, Dell Compellent and EMC VNX-beating product.

Can they do this against a background of Pillar not yet being profitable because not enough customers have bought Axiom systems? Will PIllar's executive management stick around for the three years needed to turn Pillar around, or, putting it another way, complete the start-up work and get PIllar standing on its own and profitable feet.