June 2, 2005 2:22 PM PDT

Buying StorageTek: Sun's last big gamble?

Sun Microsystems bet $4.1 billion Thursday that buying StorageTek, an established but low-growth company, will help restore Sun's financial fortunes. But it's a huge bet: It's the last cash deal of that size Sun will be able to make.

Sun plans to spend $4.1 billion of its $7.4 billion in cash and marketable securities on StorageTek in a deal expected to close by late summer or early fall. Even with the $1 billion in cash StorageTek will bring, Sun will have a hard time affording any comparable moves.

Sun is trying to rebuild its primary business, selling powerful networked computers called servers, and is trying to elevate its software products with an open-source revamp. The StorageTek acquisition, however, shows that Sun believes storage is the business where it can get the most bang for its buck.

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What's new:
Sun hopes its $4.1 billion acquisition of StorageTek will ignite its storage business, profit from new regulations, provide an entree into new accounts and keep the company on customers' short lists.

Bottom line:
Sun has ample cash left, but if StorageTek doesn't work out, its options will be limited by the fact that it doesn't have enough cash for another deal the same size.

More stories on Sun

StorageTek has a stable business, and its sales force of 1,000 will more than triple what Sun has devoted to storage, said Mark Canepa, Sun's executive vice president of storage, in an interview. And that sales force will help Sun show off other products such as servers and identity-management software to choice StorageTek customers with IBM's mainframes. "In Big Blue accounts, they can go open doors," Canepa said.

But what the acquisition doesn't provide, at least immediately, is the revenue growth Chief Executive Scott McNealy said is a top priority. That bothers some on Wall Street.

"We do question the rationale of a transaction which reduces Sun's cash hoard by 40 percent and does nothing to reignite revenue growth or profitability," Prudential analyst Steve Fortuna said in a report Thursday. "We would rather have seen the company buy back a billion shares and fire 10,000 people."

And Bear Stearns' Andy Neff also questioned the wisdom of the move. "Given the weak growth outlook for tape, we don't see strategic benefits for Sun from this acquisition," though buying a company that will boost earnings per share is a good use of cash, he said.

StorageTek was profitable in its most recent quarter, reporting net income of $23 million, the same amount as in the year-earlier period. But the $499 million in revenue StorageTek garnered in the quarter ended April 1 was a 3 percent decline from the $515 million from the year-earlier quarter.

StorageTek said it expects better financial performance for the rest of

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8 comments

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Analysts are harsh
"We would rather have seen the company buy back a billion shares and fire 10,000 people."

I guess someone has to put the "anal" in analyst though. What an ass.
Posted by Bob_Barker (167 comments )
Reply Link Flag
ass
Based on his asstute [sic] comments (share buybacks are only a temporary band-aid to prop up lagging share prices), Steve Fortuna is obviously much better at his job than the 10,000 Sun employees who he'd like to send to the unemployment line.
Posted by cheeseboy--2008 (261 comments )
Link Flag
Analysts are harsh
"We would rather have seen the company buy back a billion shares and fire 10,000 people."

I guess someone has to put the "anal" in analyst though. What an ass.
Posted by Bob_Barker (167 comments )
Reply Link Flag
ass
Based on his asstute [sic] comments (share buybacks are only a temporary band-aid to prop up lagging share prices), Steve Fortuna is obviously much better at his job than the 10,000 Sun employees who he'd like to send to the unemployment line.
Posted by cheeseboy--2008 (261 comments )
Link Flag
Some won't never understand Sun's mission
Analysts are one of these group of people. :-)

Sun needs storage because every big business (Suns main
market place) needs big storage. Now they have good machines
for the big business, good and nearly complete software stack
and a storage solution with a sales force which was successfull
in doing their job in that area. Good partners of Sun will have in
one moment a new are where they can sell solutions with Sun
technology - great deal from their point of view.

Have you read the last anaylst report? Service and storage sales
are growing, also inside SUNW. It was not the last big deal of
Sun, be sure. But it was also not the last stupid comment of
analysts.
Posted by (2 comments )
Reply Link Flag
Some won't never understand Sun's mission
Analysts are one of these group of people. :-)

Sun needs storage because every big business (Suns main
market place) needs big storage. Now they have good machines
for the big business, good and nearly complete software stack
and a storage solution with a sales force which was successfull
in doing their job in that area. Good partners of Sun will have in
one moment a new are where they can sell solutions with Sun
technology - great deal from their point of view.

Have you read the last anaylst report? Service and storage sales
are growing, also inside SUNW. It was not the last big deal of
Sun, be sure. But it was also not the last stupid comment of
analysts.
Posted by (2 comments )
Reply Link Flag
Sun
is on the move, being squeezed by Linux offerings as well as the marketing gorilla MS who could sell reading glasses to the blind, after all look what they have done with Windows- made people computing illiterate and a boat load of cash for themselves. Fools and their money are soon parted and with MS we part with it over and over and....
Posted by furian (17 comments )
Reply Link Flag
Sun
is on the move, being squeezed by Linux offerings as well as the marketing gorilla MS who could sell reading glasses to the blind, after all look what they have done with Windows- made people computing illiterate and a boat load of cash for themselves. Fools and their money are soon parted and with MS we part with it over and over and....
Posted by furian (17 comments )
Reply Link Flag
 

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