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Sun to buy StorageTek for $4.1 billion

Deal will expand Sun's storage product line, sales channels, sales force and partner network.

Sun Microsystems, looking to add market heft, is acquiring storage specialist StorageTek in a deal worth $4.1 billion, the companies said Thursday.

The deal will give Sun a greatly expanded storage product line, additional sales channels, and a larger sales force and partner network, company executives said.

Sun will pay $37 per share for each share of StorageTek, an 18 percent premium on the stock based on Wednesday's closing price of $31.23. Sun said the deal should boost its bottom line within 12 months of closing, which it expects to happen in late summer or early fall.

News.context

What's new:
Sun is buying StorageTek for $4.1 billion to become more of a one-stop-shop for corporate customers.

Bottom line:
Along with heating up its tepid storage business, the software maker is looking to be a total systems company along the lines of IBM.

More stories on Sun Microsystems

Sun CEO Scott McNealy said the combination of two companies' gear will make Sun one of the largest providers of "information lifecycle management" products, which combine hardware and software for creating, storing and archiving corporate data.

"As we looked at the total $65 billion available market for storage and things like Sarbanes-Oxley and HIPAA and other regulatory compliance issues, (we saw that) storage, data management and managing critical data assets of companies (were) becoming a more and more important component of solving complex network computing problem," McNealy said during a conference call Thursday. "We're very interested in the storage business, but this combination here takes us to new level of scale and scope on global basis."

Sun and StorageTek's storage product lines will be merged and sold by a combined sales force, executives said. StorageTek, which employs about 7,100 people, will mix into Sun's storage organization under Mark Canepa, executive vice president of Sun's storage products.

McNealy said the addition of StorageTek will boost Sun's revenue, profit and ability to generate cash. Through the all-cash transaction, Sun will gain StorageTek's $1.1 billion cash reserves.

Some risk
Gordon Haff, an analyst at Illuminata, called the planned acquisition a "bold move" that makes sense for Sun but does carry some elements of risk.

In particular, he said that many corporate customers tend to either buy storage products from their server vendors, such as IBM or Hewlett-Packard, or they seek out storage specialists, such as EMC or Network Appliance.

"It's a big expenditure. It's essentially a big bet for Sun to transform themselves into a total systems company more in the vein of IBM than they were," Haff said. "Certainly, this kind of expenditure means that Sun is really committed to having a successful storage business. Otherwise, this will be looked back on as a huge waste of money."

Haff said that Sun's storage business until now has not been very successful.

Sun and StorageTek have an existing partnership. Sun is StorageTek's largest original equipment manufacturer (OEM) partner, according to StorageTek, and offers StorageTek products under Sun's StorEdge brand name.

StorageTek also has reseller arrangements with Hewlett-Packard, Fujitsu Siemens, SGI and Unisys among other companies. Sun currently offers some storage products, including its StorEdge 6920 storage system, and a month ago bought storage assets from Procom Technology.

Those OEM relationships with Sun's competitors could pose a problem for Sun, analysts said. Sun executives and StorageTek's current CEO and president, Patrick Martin, said that the combined company will seek to maintain those partnerships.

"We expect the relationship to continue as is. I don't see any major concerns there," Canepa said.

Martin said that no single OEM represents more than 10 percent of StorageTek's revenue.

"We will be a consolidator"
Sun executives said that the StorageTek deal is part of an ongoing process to fill out the company's product line, and indicated that more acquisitions could be forthcoming. Sun recently bought storage assets from Procom Technology.

"We will be a consolidator in the industry," said Jonathan Schwartz, Sun's chief operating officer. "This represents a holistic platform strategy."

The combined company will have tools to build business applications, the servers to run them and now a broad storage product set to store and archive corporate data, executives said. Sun also intends to use its identity management server software to provide secure access to data.

The access that Sun gains to StorageTek's customers--many of whom have mainframes--and its sales network or resellers is as valuable as the technology, Schwartz said. "We're channel-constrained, not necessarily constrained by our R&D portfolio," he said.

The two companies both sell disk-based storage, which Canepa said represents some area of overlap. He said the disk-storage product line will likely be simplified once the companies are combined.

StorageTek, based in Louisville, Colo., employs about 7,000 people worldwide. In fiscal 2004, the company reported $191 million in net income on sales of $2.2 billion, compared with $148.9 million in income and $2.18 billion in revenue for 2003.

Sun, which in the 1990s became a dominant seller of powerful, networked computers called servers, has struggled as of late. Since the Internet bubble burst and the economy slumped, the Santa Clara, Calif.-based company has struggled to return to that position of strength. Rivals including IBM and Dell continue to gain market share at Sun's expense.

In fiscal 2004, Sun reported revenue of $11.2 billion and posted a non-GAAP loss of $189 million.

In morning trading, Sun's shares dropped about 3 percent, to $3.79, while StorageTek's shares gained roughly 16 percent, to $36.