Sun Microsystems pulled $4.1 billion out of its $7 billion war chest to purchase Storage Technology, a buy that proves the vendor is serious about transforming into a powerhouse in the storage and emerging information lifecycle management (ILM) arenas.
At first glance it may appear that Sun, in its largest cash deal to date, is acquiring little more than tape storage and backup, technology that has been waging a tough battle against competing disk offerings over the last two years. StorageTek is one of the top four independent vendors in the tape automation space, a market which for now is fairly flat. (The Louisville, Colo.-based company is seeing its disk business grow slightly, thanks in part to an OEM deal with Engenio, which also OEMs arrays for IBM, Sun, and SGI.)
Adding to its traditional storage portfolio, however, is not necessarily the real gravy of the deal, according to Sun executives. Rather, the acquisition gives Sun, Santa Clara, Calif., the potential to provide secure information lifecycle management (ILM), a hot button for customers due to increasing government regulation of how data is stored and managed, including requirements for HIPAA and Sarbanes-Oxley compliance.
On a conference call Thursday morning, Sun Chairman Scott McNealy highlighted the plans to be a leader in the ILM space, noting that the combination of Sun's identity management software and other secure systems technologies will complement StorageTek's own plans to provide ILM solutions.
"It became very apparent that there is a very interesting alignment in terms of our vision around network storage, around end-to-end information lifecycle management," McNealy said. "We have the ability to handle the entire lifecycle of data securely with a better chance at the appropriate levels of privacy and availability than anybody else out there in the marketplace."
One snag in this grand vision is that StorageTek does not have much in the way of ILM software at the moment, though its disk offerings are a good basis for ILM solutions. However, Brenda Zawatski, StorageTek's vice president of information lifecycle management, hinted that a comprehensive ILM software portfolio is in the works.
"We have a whole roadmap of [software] products that when we went through this acquisition, [decided] fit in nicely with Sun's vision of what they want to do from a storage perspective," Zawatski said.
One solution provider noted that it's foolish for Sun to pony up more than half of its cash on a company that is seeing its core competency--tape storage and backup--lose market share, while it OEMs some of the same disk arrays as Sun's competitors.
"[StorageTek CEO] Tom Martin pulled the wool over someone's eyes to get $4 billion for that shrinking company," said the VAR, who asked not to be named. "Using up $4 billion of $7 billion to buy [StorageTek] isn't the way I would've spent my money." Further, the VAR said that betting so much on a forthcoming product set that has not been proven in the market is a risky maneuver for a company already in troubled financial waters. He also noted that Sun, which has had difficulty managing its workforce numbers in light of dwindling revenue over the last four years, will likely have to make major workforce reductions to absorb StorageTek's 7,000 employees.
One of Sun's chief competitors HP naturally questioned the logic of the deal as well. Patrick Eitenbichler, director of marketing for HP StorageWorks Division, said the move "reeks of desperation" and is "yet another strategic blunder" because purchasing StorageTek does not promise high long-term revenue growth.
Still, solution providers said the acquisition does give Sun an opportunity to go cross-platform with its storage offerings, something that has eluded the vendor since it began doubling down on storage over the last few years. In that time, Sun has made several acquisitions and OEM deals in an effort to sell storage technology to new customers, and even appointed Rich Napolitano, the former CEO of Pirus Networks--a storage company acquired in 2002--to head up its U.S. sales organization.
"[The deal] is a nice play to get into competitive accounts such as IBM and HP stronghold accounts," said Tom Kuni, president of Metuchen, N.J.-based VAR SSIhubcity. "StorageTek absolutely is a de facto standard inside of major data centers."
StorageTek, with its high-end tape arrays that play in the largest enterprises, also gives Sun the weapon with which to go head-to-head with IBM in the mainframe space, said Pat Edwards, vice president of sales at Alliance Technology Group, a Hanover, Md.-based StorageTek solution provider which recently signed on with Sun.
"Sun has its E10K servers and mainframe-class processors," he said. "But it's not getting into the high-end space, which is owned by IBM. This will open doors for them."
Publicly and to no one's surprise, Sun executives expressed nothing but optimism for the deal. McNealy said purchasing StorageTek, a plan that has been in the works for about six months, was a no-brainer. Sun and StorageTek have enjoyed a 10-year partnership and there is very little overlap in the companies' technologies.
Another boon for Sun in the deal is the company will acquire 1,000 new storage sales representatives and a host of storage VARs. StorageTek said 40 percent of its business goes through the channel. Sun is committed to working with all existing StorageTek partners, but has no specific plans for integrating them into Sun's iForce program yet, a Sun channel spokeswoman said.
StorageTek reported $2.22 billion in revenue for the year ended 2004, a slim increase from the $2.18 billion reported in 2003. The company has $1 billion in the bank, which means the total cost of the deal to Sun will be about $3.1 billion in cash when all is said and done, said James Whitmore, a storage marketing vice president for Sun.
Still, the fact that Sun would take more than half of its cash to purchase a company is not trivial, he noted.
"It's a significant investment, and not something either company takes lightly," Whitmore said. "We see huge revenue opportunities in the storage, data management and systems space."
Sun expects the deal to close in the next 60 to 90 days, but that it will not have effect on the vendor's revenue for at least a year, he added.
JOSEPH F. KOVAR CONTRIBUTED TO THIS ARTICLE