Oracle and Pillar, Microsoft and Skype: Lessons Learned

Rob Enderle

Facebook is expected to launch a Skype service this week, but the more interesting story is the mysterious executive layoffs at Skype - one of them ex-Microsoft - right before Microsoft got control.


Another interesting acquisition was Pillar Data Systems, which is kind of a 3PAR-like company that Oracle acquired for nothing - well, sort of - and may become a super bonus for its CEO.


There are a couple of interesting lessons in these that I think are worth hitting on this week.

Oracle, Pillar and the Ethics of Self-dealing

The lesson I take away from this deal is that no matter what you do to mitigate a conflict of interest, as long as you are still involved, the effort will simply make the appearance of wrong-doing more pronounced. Or, put another way: If you are going to profit from something, you are going to sell to your own company and it is a bonus and likely should be treated as that rather than artificially concealed. Let's look at the Oracle-Pillar deal.

Pillar Technologies was believed to be second to 3PAR with a storage market offering, and while 3PAR got bid up into the billions in a bidding war between HP and Dell, Pillar couldn't find a buyer. This isn't because the company didn't have merit; it was largely because Larry Ellison had a massive stake in the firm. Potential bidders looked at the firm and realized that no matter what they bid, Oracle would likely end up with it and all they would is validate that a price was set competitively so that Oracle could write Larry a massive check. In short, it was a game it couldn't win and would look stupid for playing so it didn't bid.

In this class of product, you need the stature of an enterprise company and 3PAR - which had already been kicking Pillar's butt - had it and Pillar didn't. The only company it could sell to was Oracle, but without a competitive bid, any such purchase would look like Oracle was paying its CEO a huge bonus for a company of questionable worth.

So the firm went through a lot of trouble structuring a deal with an independent (if you discount they all were effectively being paid by Larry) team of negotiators who structured a deal that tied what Oracle paid to what Pillar could generate. They then handed the result over to Larry to manage, who controls the Oracle sales, resource and intercompany funding resources and has about $500 million at risk in this deal. Anyone want to take odds on Pillar not meeting its objectives? Now Larry has the chance to get several times his investment and three guesses where the money is coming from.

The right thing to have done is have a third-party assessment of whether it should buy the firm, pay Larry for what he had into it and then execute the deal. I'll bet it would have cost Oracle less and its customers less, and the result wouldn't have looked as questionable as this one will when the final amount Oracle pays is disclosed.

Microsoft, Skype: A Cautionary Tale

I got a call a few days ago asking why Skype was laying off some high-ranking employees right before Microsoft took over. Microsoft seemed to be getting the brunt of the speculation at the time, not unusual for the company, but it didn't have control yet. Silver Lake Partners, which sold the company to Microsoft, is now caught in a bit of a scandal. But it points out some distinct differences between the way private equity firms handle companies and the way venture capital firms handle companies.

Venture capitals operate with the idea that the firm is a concern and they are compensating executives for the long term. They generally build a company and want their options open for an IPO, but can fall back onto a sale. Private equity firms, on the other hand, are packaging a firm for sale for the most part and this suggests there are additional risks with them because venture capitals, due to the nature of an IPO, have more long-term risk, while private equity firms sell and get out.

This is the difference between buying a car from someone who had bought it himself, cared for it and then sold it, and someone who bought a car at auction and fixed it up for sale. It suggests that the due diligence when buying from a private equity firm likely needs to be far more robust and, particularly after this Skype event, include details on staffing plans between when the deal is agreed and the property goes to the buyer.

Wrapping Up

Ethics is dangerous ground. There is nothing wrong with making money - if there were, we wouldn't be able to pay our bills. But these events showcase that it is both wise to avoid conflict and, if you have to accept it, do so cleanly rather than try to build in a lot of complexity to offset that conflict. This is because that complexity is also built under that same conflict and may instead result, as it may have done here, in more self dealing.

That self interest is what differentiates venture capitals and private equity firms and suggests a different approach to buying from each, particularly with regard to employee protection. For instance, if a lot of staff are going to be fired or resign after the sale, the property may have far less value than otherwise estimated. Or, put another way, a firm being sold by a private equity firm has a much higher probability of being a nice-looking shell with little that is viable on the inside.

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