June 2, 2005 2:22 PM PDT
Buying StorageTek: Sun's last big gamble?
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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.
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.
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.
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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