October 2, 2001 12:00 PM PDT

Sun acknowledges acquisition misfires

Sun Microsystems has acknowledged three flops in its acquisition strategy in the areas of consumer gadgets, storage and software.

Sun reported in a regulatory filing that the acquisitions of Diba in 1997, Encore in 1997 and NetDynamics in 1998 didn't work out as hoped.

In all these cases, products that didn't match initial expectations forced the Palo Alto, Calif., server maker to write off a total of $51 million of value, the company said in a filing with the Securities and Exchange Commission.

The disclosure highlights the difficulties of acquisitions, even of comparatively small companies such as 79-person Diba. Start-up cultures often don't match that of the acquiring corporate leviathan. Problems can arise when products are reworked to align with new goals, employees depart, and computer systems and benefits don't match.

But Sun can take solace that its acquisitions, typically of smaller companies, were strolls in the park compared with Hewlett-Packard's planned acquisition of Compaq Computer. The magnitude of that task has left many skeptical, and the resulting stock slide has shrunk the value of the deal from an initial $25 billion to $16.4 billion today.

Even when product plans don't pan out, companies often get assets such as personnel and expertise from acquisitions. For example, Sun in 1996 acquired Jonathan Schwartz's company, Lighthouse Design, and Schwartz has been steadily moving up through Sun's ranks to his current position of senior vice president of strategy and planning.

But the SEC filing pricks holes in Sun's often-lofty promises. Sun acquired Diba to jump-start its effort to spawn a world of Internet-connected gadgets that would run programs written in Sun's Java language. At the time of the Diba acquisition, one of Sun's new executives promised, "Together, Sun and Diba can work on closing the information gap between the technically elite and the rest of society."

In reality, though, the company canceled plans for a set-top box using Diba technology because of "a change in the long-term strategy for the underlying product," Sun said. The company took a $9 million charge.

In the case of NetDynamics, "At the time of the acquisition, the technology acquired...was expected to be utilized in a collaborative application. The current and future plans for utilization of this technology have diminished materially," Sun said in the SEC filing, such that the company had to take a total of $33 million in charges.

Sun had hoped Encore would give it a high-end storage system, but the company ended up having to sign a deal to sell Hitachi Data Systems products instead. "Although all but one of the key products utilizing the acquired technology from Encore commenced shipment in fiscal 2000, certain factors, including delays and changes in packaging and delivery strategy, diminished revenue expectations attributed to the technology acquired from Encore," Sun said. "As a result, future cash flows from the use of Encore's technology was determined to be negligible in fiscal 2000," and Sun had to take a $9 million charge.

Sun Chief Operating Officer Ed Zander remarked last week that the acquisition of Cobalt Networks also hasn't been all that the company hoped, in this case because the collapse of the Internet economy undermined sales of Cobalt's inexpensive servers used chiefly for hosting Web sites. Sales "stalled a bit with the economy, with the Internet (business collapse)," and with the decline in Internet service provider businesses, Zander said at the launch of the company's top-end Starcat server.

 

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