Sun Decides to Go on Offensive
Sun Microsystems Inc. said Thursday that it would buy another fallen tech star, Storage Technology Corp., for $4.1 billion, spending most of its cash hoard in a defensive move to join with a slow-growing but profitable ally.
The step reflects what Sun Chief Executive Scott McNealy said was a determination by the big computer maker to be a buyer -- rather than a target or bystander -- as the technology industry consolidates. But the largest acquisition in Sun’s history was deemed too conservative by some investors and analysts who are frustrated over the company’s long decline.
Sun shares slipped 11 cents to $3.79.
Critics said they would rather see the Santa Clara, Calif.-based company cut additional costs to bolster its sagging bottom line or buy a faster-growing company. StorageTek, as the Louisville, Colo.-based company is known, earned $191 million last year on sales of $2.2 billion.
Most of StorageTek’s profit increases in the last five years have come from cost cutting as sales have stagnated, said Morgan, Keegan & Co. analyst Brian Freed. Sun’s revenue also has held steady, at about $11 billion, and the firm has lost money for several years.
“People are a little disappointed,” Brent Bracelin, an analyst at Pacific Crest Securities, said about Sun’s bid. “It certainly would be more interesting for them to acquire a higher-growth company.” But Bracelin said Sun could afford few other companies with StorageTek’s revenue and cash flow.
Founded in 1969, StorageTek peaked much earlier than Sun, which was a highflier when it supplied dot-com companies with computers.
StorageTek’s stock topped $100 a share in the 1980s, when the tape-based data storage it champions was used by many mainframe computers. Back then, disks were a much more expensive alternative. Disk prices have fallen, but many companies continue to use the still-cheaper tapes for archiving old data.
At the end of its most recent quarter, Sun reported cash and short-term securities of $3.1 billion. StorageTek has $1.1 billion in cash and investments, making Sun’s effective price for the company about $3 billion.
Sun would pay $37 in cash for each share of StorageTek, an 18% premium to Wednesday’s closing price. StorageTek rose $5.13 on Thursday to $36.36.
Regulators and StorageTek shareholders have yet to approve the purchase, which is expected to be completed in late summer or early fall. Sun CEO McNealy declined to comment on job cuts or the extent of restructuring charges, which would keep the acquisition from adding to Sun’s net income in the year after the deal closes.
Potentially more important than StorageTek’s products or finances, analysts said, is its 1,000-person sales staff and its 2,000 service employees. Sun has been moving away from selling hardware toward higher-margin services.
McNealy said StorageTek’s sales force would sell Sun computers and Sun’s own storage products, competing better with storage leader EMC Corp., Dell Inc. and others.
“We lose to EMC not on product but on field credibility,” McNealy said, adding that talks with StorageTek had progressed over “many, many months” before the deal was struck.
