Sun to Acquire StorageTek for $4.1B

In early-morning bombshell, Sun outlines plan to 'juice' channel sales by buying tape partner

June 2, 2005

3 Min Read
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Sun Microsystems Inc. (Nasdaq: SUNW) this morning announced plans to buy Storage Technology Corp. (StorageTek) (NYSE: STK) for $4.1 billion in cash by the end of this summer.

Sun hopes to leverage StorageTek's sales channels, which encompass mainframe storage customers as well as buyers in vertical markets like government, financial services, telecommunications, and healthcare, to expand Sun's storage footprint and thereby help build its overall data center business. Sun sees its future as being a provider of "heterogeneous, open systems" -- a future tied to the success of storage networking products, including StorageTek's tape libraries.

"We... are confident that the combined enterprise... will significantly expand our customer base and opportunities for growth," said Sun CEO Scott McNealy in a prepared statement. And Jonathan Schwartz, Sun's COO, referred to Sun's goal of offering "one architecture to build applications and store data."

The companies were rumored to be talking about a merger for years, but recent scuttlebutt had the talks stymied when Sun balked during due diligence. Now, that's water under the bridge. Pending regulatory approvals, Sun will shell out about $37 per share to close the deal by the end of the summer or early fall 2005.

An integration team will oversee the blending of StorageTek's roughly 7,100 employees into the 32,000-odd Sun population. Mark Canepa, executive VP of Sun's Network Storage Products Group, will be in charge, though execs at both companies aren't being specific about how the ultimate grouping will look, or who will or won't be staying on.Sun execs claim the deal will be accretive to Sun within its first year of completion, but they won't set a specific target.

Both Sun and StorageTek have been struggling, particularly as storage spending tightens overall and, in StorageTek's case, tape sales weaken (see Storage Spending Slips).

Analysts grilled both companies on a conference call this morning, and a few key points emerged:

  • Channels are the big attraction. McNealy repeatedly referred to StorageTek's channels as key to this deal. He and other execs acknowledged Sun has been challenged in selling storage, and he repeatedly referred to StorageTek as having the needed feet on the street to get the word out. The plan is to use StorageTek's sales channels to boost Sun's presence, enabling it to bring along software and server products as well.

  • Sun's not worried about product overlap. Neither Sun nor StorageTek is concerned about resolving overlap of products OEM'd from Engenio Information Technologies Inc., execs claim (see Engenio's Sun Rises). While conceding there may be some overlap and consequent "simplification" of product line, execs made it clear they weren't thinking about sweeping changes.

  • Sun's not worried about HP. StorageTek's recent resale agreement with Hewlett-Packard Co. (NYSE: HPQ) won't be affected by the merger, execs say (see StorageTek, HP Deal on Tape). "We expect the relationship to continue as is. I don't see any major concerns there," Canepa said.

  • Sun's not worried about tape's future. CEO McNealy sees no wolf at the door for tape libraries: "Thirty-six percent of the archived data on the planet is on StorageTek equipment... that's 5 percent more cost-effective than archiving on disk," he asserts.

  • Sun's on a spending spree. After the merger, Sun hopes to have $4.5 billion left in cash and investments with $1.1 billion in debt. This will enable it to keep buying into its strategy of being a heterogeneous data center provider. McNealy made it clear StorageTek wasn't the only acquisition on Sun's radar, just the most recent one.

Sun's latest purchase should keep it more than busy for awhile. The consolidation resulting from the move will also take time to reverberate in the market. Stay tuned for more as this story develops.

Mary Jander, Site Editor, Byte and Switch0

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