It [StorageTek] was available, it made sense, and it’s a very well run company. This is not an acquire-and-turn-around situation, it’s generating cash and has a very stable customer base, said Sun CEO Scott McNealy. But Mr McNealy would not say what the growth targets for a combined Sun-StorageTek will be.
We’re getting a thirty-year old storage savvy channel that has a strategic and cozy relationship with its customers – including mainframe customers, said Sun’s storage executive vice president, Mark Canepa. Asked whether the IT staff that buy storage gear are the same as those buy that Sun’s servers and other products, Mr Canepa agreed that they are not. But there are also CEOs and CIOs who make strategic decisions about the future of their companies’ data centers, he said.
The purchase plan came as a bombshell when it was revealed this morning. The two companies had worked on the deal until around midnight on Wednesday, and then made the announcement as soon as possible, at 5.15am local time the next morning at Sun’s headquarters in California – half an hour before sunrise.
Sun is offering $37 cash for each StorageTek share, representing an 18% premium over Wednesday’s market price, and says it expects to close the deal late this summer, or early in the Fall. The share price premium may not be quite as generous as it first seems, because StorageTek is currently sitting on a hefty $1 billion pile of cash and investments.
Sun has long been a very weak player in the storage market, compared to other server makers such as HP and IBM. In 2002 Sun promised to change this situation and it revamped the senior management of its storage, appointing Mr Canepa as its storage chief. But the recovery has yet to happen.
StorageTek meanwhile faces a long term challenge to reduce its reliance on slow growing tape revenue, and has been attempting to boost the disk and services areas of its business. It saw its revenue increase just 2% to reach $2.2 billion last year, although it did score a healthy gross margin of 49%. This year the company expects its revenue growth to match overall storage market growth of around 4% to 5%, despite disappointing results in its last two quarters. Tape products accounted for 46% of StorageTek’s revenue, while disk accounted for 8% and services the remaining 41%.
Sun’s disk products overlap only slightly with those of StorageTek, and Sun already OEMs tape products from StorageTek. It said it expected only minor changes to the two company’s product roadmaps.
During the conference call announcing the purchase offer, Sun talked of a total systems approach to ILM resulting from a merger with StorageTek, and of the security technology it can add to StorageTek’s ILM portfolio. But it is not products that Sun really wants from StorageTek. Instead it is StorageTek’s channel, and its customer base that includes IBM mainframe owners who until now have had no reason to deal with Sun.
It’s become increasingly obvious to us that we’re channel constrained, said Sun CEO Scott Mr McNealy about his company’s storage business. We asked ourselves who are not going to simply help us on the technology side, but give us juice on the channel side?
Sun’s sales-force numbers around 10,000 or more, and StorageTek will add another 1,000 storage specialists to that number, with another 2,000 storage services staff. StorageTek also operates an indirect reseller network, which it said is responsible for around 40% of its revenue.
Among the OEM deals that might be threatened by the acquisition is the deal that was announced very recently and sees HP OEMing a StorageTek mid-range tape library. Before the merger with Compaq, HP OEM’ed a wide range of StorageTek tape libraries. Post-merger, it switched away from StorageTek. Sun and StorageTek said that since they both buy large volumes of LTO tape drives made by HP, HP is unlikely to cancel the library OEMing deal.
