(ORCL) Oracle Buys Pillar Data Systems

Oracle Corp. (ORCL) recently entered into an agreement to acquire privately held data storage company Pillar Data Systems. Oracle CEO Larry Ellison holds a majority stake in Pillar Data Systems.

Under the terms of the agreement, Oracle will not pay anything up-front. Oracle will only pay compensation based on the attainment of operational milestones by Pillar Data Systems. The compensation amount (if any) will be determined by an independent committee. Oracle expects to close the deal in July 2011.

Pillar Data Systems offers products that combine Storage Area Network (SAN) and Network Attached Storage (NAS), helping customers to consolidate their storage into a single and highly scalable device. More than 1500 units of the company’s flagship product Axiom has so far been sold to over 600 clients.

The acquisition will help Oracle to offer a complete set of data storage products, which will enhance the speed and efficiency of its software.

Analysts believe that the acquisition is significant for Oracle, considering the recently terminated reselling relationship with Hitachi Data Systems, pursuant to its policy of not reselling third party products. The strategic shift from reselling third party products is also expected to boost Oracle’s revenue and margin growth over the long term.

Moreover, the acquisition will help Oracle to expand in the storage market. The strong product portfolio will also boost Oracle’s competitive prowess in a market mainly dominated by EMC Corp. (EMC), NetApp Inc. (NTAP), International Business Machines Corp. (IBM), Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ).

According to research firm Gartner Inc. EMC is still the leader in the external controller-based (ECB) disk storage market, with 30.1% market share, compared with Oracle’s 1.7%. NetApp and IBM were placed #2 and #3, respectively, with 12.5% and 11.7% market share.

Oracle provides Storage vision

The Pillar Data acquisition reflects Oracle’s current storage strategy, with the potential of enhancing the performance of the company’s software on its storage. Oracle outlined its storage policy and newly expanded product portfolio in a recent investor and consumer meet.

Oracle is integrating its storage products with its entire software portfolio to deliver strong performance in a mixed storage environment. Oracle showcased a number of products targeting enterprise customers. The products include Exadata Storage, ZFS Storage Appliance, Pillar Axiom storage and StorageTek Tape.

Oracle Exadata Storage supports Oracle’s database software, while the ZFS Storage Appliance offers high-performance Network Attached Storage (NAS) consolidation for Oracle software, test and development and data protection.

The newly acquired Pillar Axiom storage supports Storage Area Network (SAN) Block I/O, while StorageTek Tape is highly scalable, reliable and available for consolidating data for archive and data protection.

The new products are cost effective as they are capable of delivering up to 10x faster performance with only one tenth storage capacity.

Our Take

Oracle is a dominant player in the database software market, with more than 50.0% share. However, we believe Oracle will take some time to achieve similar growth rates in the storage market due to stiff competition.

We expect consolidation to continue in the storage market and believe that Oracle will make further acquisitions to expand its footprint. Oracle currently has $9.51 billion in free cash flow, which will enable it to make further acquisitions and pursue any growth strategy of its choice going forward.

We maintain a long-term (6–12 months) Outperform recommendation on Oracle. Currently, Oracle has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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