Sun Buying StorageTek for $4.1B

MarkEst1973 writes "Sun Microsystems Inc. is buying Storage Technology Corp. in a $4.1 billion cash deal, the companies announced Thursday. The acquisition answers lingering questions about what Sun would do with about $3.1 billion of balance sheet cash. StorageTek is a profitable company with $191 million in profit in '04 on $2.2bn in sales while Sun posted a loss last year (albeit a much smaller one than the year before)."

Comments

Oooh

[c0ldfusi0n]

So that's why the two StorageTek people in the room next to my office are soo happy.

Reverse acquisition?

[sjbe]

This strikes me as something close to an exit strategy by way of diversification for Sun. Their core server business is seriously erroding and under attack from all sides. This gives them potentially two things. First, a way to provide integrated product lines. Servers and storage are complementary businesses and I could see Sun offering tightly bundled turnkey installations. Second, this gets Sun a profit center to keep them afloat as they transition their business model.

Though it might not be advertised as such, this might be akin to a reverse acquisition since StorageTek is profitable and Sun isn't. It's interesting, though not surprising, that Sun had to pay cash. Their stock isn't worth much these days and no one is going to lend them money with a BB+ credit rating.

Re:Reverse acquisition?

[Glock27]

This strikes me as something close to an exit strategy by way of diversification for Sun.

I don't think so.

Their core server business is seriously erroding and under attack from all sides.

Actually, its server business has grown the last couple of quarters. Plus, its Opteron line coupled with Solaris is a strong offering. Yahoo Finance shows Sun as profitable with a P/E of 19 right now...low for a tech company.

This gives them potentially two things. First, a way to provide integrated product lines. Servers and storage are complementary businesses and I could see Sun offering tightly bundled turnkey installations. Second, this gets Sun a profit center to keep them afloat as they transition their business model.

Transition its business model to what? Sun has always sold (and resold) storage solutions.

Though it might not be advertised as such, this might be akin to a reverse acquisition since StorageTek is profitable and Sun isn't.

Yahoo Finance shows Sun as profitable with a P/E of 19 right now...low for a tech company.

It's interesting, though not surprising, that Sun had to pay cash. Their stock isn't worth much these days and no one is going to lend them money with a BB+ credit rating.

Don't count Sun out yet...it employs many smart people.

Re:Reverse acquisition?

[clem]

Don't count Sun out yet...it employs many smart people.

Yes, but they also have a number of rabidly political middle managers who do their best to ensure that the smart people are left rotting on the dock.

Why, yes, I am a former employee.

Re:Reverse acquisition?

[Jack Taylor]

I could see Sun offering tightly bundled turnkey installations.

The first time I read that as "tightly bundled turkey installations". Time to get some sleep...

Re:Reverse acquisition?

[elmegil]

And even some non-former employees see the same thing. I hope that all the pie in the sky being sold about this acquisition internally is right, but I'm not holding my breath either.

Re:Reverse acquisition?

[illumin8]

And even some non-former employees see the same thing. I hope that all the pie in the sky being sold about this acquisition internally is right, but I'm not holding my breath either.

What I remember from my few years at Sun was that the management team was really good at blowing smoke up your ass and making you think that Sun was going to turn around. Every quarter you'd have to sit through some meeting where management would literally almost brainwash you into thinking that Sun was the center of the universe and that soon we would take over the entire computer industry. The thing that was scary was that despite all of the negative earnings and missed sales goals, they were really good at it, and after a while of working there you start to have the same type of groupthink and sheltered worldview that management has.

The fact of the matter is that Sun, at one point in time, had great people in a position where they could accomplish a lot. Nowadays, middle management actively sabotages anything remotely possible of success simply because they cannot tolerate the thought that an engineering team might create a technology that could save the company.

What you have now in Sun is typical of a lot of companies: Management wants to drive innovation through marketing and dictating to engineers what to create. We all know as engineers and geeks that this never works. True innovation does not come from the top down, it comes from the bottom up. Think Bill Joy and BSD Unix. These were not started because some team of unemployable middle managers decided that the industry needed an open operating system that anyone could write software for. These were started because a brilliant engineer had a vision and was given the right amount of time and freedom to create that vision in reality.

The sooner Sun tanks and all of the engineers regroup into garages and really start inventing again, the better, for all of us.

Re:Reverse acquisition?

[Bryan-10021]

An exit strategy like IBM in the 90's? Companies go through good times and bad times and Sun will turn themselves around just as IBM did.

For those too young to remember the 90's, it was a time when IBM was getting beat up by RISC UNIX boxes from HP and Sun and mainframes were on the way out.

If Sun wanted to get out of the server market then how do you explain spending $500 million on Solaris 10? Why invest in an all new line using it's own developed Sun hardware based on AMD Opteron chips? Or the new SPARC Throughput Computing chips (http://www.sun.com/processors/throughput/)?

Re:Reverse acquisition?

[aclarke]

...management would literally almost brainwash you into thinking that Sun was the center of the universe...

Well, Sun is at least the centre of the solar system...

(I'm sorry. Really. I couldn't resist)

Re:Reverse acquisition?

[fupeg]

Nowadays, middle management actively sabotages anything remotely possible of success simply because they cannot tolerate the thought that an engineering team might create a technology that could save the company.

That's interesting. The reasons behind Sun's failures are no secret. They made a ton of money in the late 90's selling Big Servers. They expanded like crazy and spent a lot of R&D money on making Even Bigger Servers and on developing software for Big Servers. They were in the worst possible position when the bubble burst. They did not handle the shift to smaller, faster x86 based servers. They did not handle the shift to open source enterprise software, even though much of it was written in their very own Java language.

It was a lot like the American car makers of the early 70's who were not able to deal with the public wanting smaller, more fuel efficient cars instead of just bigger and faster ones. Of course bigger, less fuel efficient cars did make a big comeback eventually, in the way of SUVs. Similarly, maybe Big Servers are making a comeback in the way of multi-core chips?

Anyways, externally that seems to be why Sun has fallen on hard times. They were too heavily invested in technology that was fueled by the dot com and telecom bubbles, and were unable to adapt to disruptive technologies (fast x86 servers, open source software such as Linux.) I had always guessed that this was just another case of smart people making clever technology that nobody wanted. It would be interesting to know how company politics played a role in this. Were engineers advising smaller, cheaper servers in 2000 and nobody listened? Did engineers want to switch to open source software in 2001?

Re:Reverse acquisition?

[illumin8]

They did not handle the shift to smaller, faster x86 based servers. They did not handle the shift to open source enterprise software, even though much of it was written in their very own Java language.

I think this is an accurate assessment. When Linux and Open Source started to become a real market force, there were a lot of geeks and engineers within Sun that were very pro-Linux. We could see that Linux was the future. Then, there were management types that only saw Linux in the same close-minded view that Microsoft does, as a competitor that should be crushed. The problem is that although there are pockets within Sun that are very pro open source, they get drowned out by the groupthink that permeates from the top down. The groupthink that says "Linux bad, closed source good..."

It has gotten to the point where if you're a Sun employee, it could be dangerous to your career to be too much pro-Linux. For example, I had workers on my team snicker at me and say comments like "kid's OS" whenever I'd discuss something about Linux.

Think of it like this: If you're a Microsoft employee, when you're sitting around with your co-workers at lunch, are you going to tell them you spent the weekend at home setting up an Asterisk server running Linux? Not if you value your job you're not.

This culture permeates the company, and stifles innovation.

This is how I would fix Sun:

- If you manage a team of less than 10 people, you're out, period. There are many middle-managers that only have 4-5 direct reports and pull in 6 digit income. They came on-board during the dot-com boom and play political games to ensure they never get laid off. They would be the first to go. I'm sorry, I don't care how good you are, if your only job is to sit around and tell 4 or 5 people "work harder", you're not needed.
- Fire Scott Mcnealy. Really, I don't see how he's lasted this long.
- Get new executive level management that has a clue.

I think the first solution alone would probably cut 1000 head count and bring Sun to profitability immediately.

Anyway, what do I know, I'm just a former SSE that worked for a Sun partner.

I do like system administration on Sun though. I also like Linux. There's no reason those two platforms can't co-exist. The right tool for the job is what I always say...

Re:Reverse acquisition?

[1lus10n]

Also a former employee here. I dont think mcnealy is the problem. Its the people between mcnealy and the talent. People like schwartz (who has to be the biggest fucking ass ever).

A lot of people think Sun will get bought out, the name and talent alone are worth the going rate these days. Buy sun, fire all of management and essentially absorb the engineering and service departments.

Re:Share Prices

[brickballs]

from the article: "The deal, if completed, will pay StorageTek (Research) shareholders $37 a share, or an 18.5 percent premium on Wednesday's close."

Well connected

[youknowmewell]

StorageTek is well connected with many other storage providers and some of their products are becoming of interest to the mainframe guys where I work. Future products to encrypt data going to tap using hardware will definitely increase their profitibility, if those products ever come out (suppose to come out 2006 last I heard). This is certainly a big buy for Sun.

Dumb dumb dumb

[wheatking]

Lets buy a tape storage specialist (founded in 1969) as our answer to business and technical challenges facing us today? I wonder which bright Sun exec thought up that one vs. making a smart(er) move on one of the Linux/cluster storage outfits around (Panasas et al) that will give Sun some legs for the next decade, not just geriatric technology with boardroom relationship based Sales that go away with the boomers retiring in the next ten years.

Re:Dumb dumb dumb

[Dammital]

"Lets buy a tape storage specialist..."

... who, BTW, also manufactures and markets disk array subsystems. When IBM's own array products floundered, they ended up remarketing STK's disk subsystem as the "IBM RAMAC Virtual Array", which arguably kept EMC from eating IBM's lunch.

"... geriatric technology..."

You ought to learn something about the "geriatric technology" before you take shots. Those nines of uptime come as a result of redundant design, high quality components and media, and a paranoid culture shared by both the vendors and practitioners.

"... boardroom relationship based Sales that go away with the boomers retiring in the next ten years."

If more PFCSKs would actually talk to the boomers then they might find that we solved a lot of their problems years ago. Businesses came to depend on automation during our watch, and we were required to make the automation reliable and continuously available. This meant expensive hardware, complex software, mountains of documentation and more bureaucracy than you can shake a stick at -- change management, capacity planning, maintenance procedures, quality control, all that stuff that you hate to do, that gets in the way of the stuff that you want to be doing, but which keeps your business running.

(Sidebar: bureaucracy isn't a dirty word. It keeps enterprises going even during periods when you have sickouts or turnover or hurricanes or management changes or... whatever. It's hard to change procedures in a running bureaucracy, but it's also hard to kill a well-running one.)

We boomers, along with our "geriatric technology" and our inflexible bureaucracies, operate an astonishing amount of business that most people simply take for granted. It's like picking up your telephone -- everyone just expects to hear a dial tone, and never stop to consider the combination of science, technology, sweat and (yes) bureaucracy that makes that dial tone available to you 24/7. It's disheartening, really. Figuratively speaking, we provided dial tone for years, and the PFCSKs come along with downloadable ring tones and now management oohs and aahs. Okay, so I guess we should have marketed ourselves better.

(And yes, I wish more boomers would listen to the PFCSKs, too.)

Re:Accounting

[Thanatopsis]

8.6% profit on HARDWARE is spectacular. Hardware is a very low margin business.

Re:Wait....

[stlhawkeye]

Only half joking....lots of organizations I know of are pulling their support for Solaris and are buying cheaper machines from other vendors to run Linux on. I'm sure Sun has a substantial customer base left, but I wonder how long it will last as Linux continues to rise.

Every place I've worked has either abandoned or is in the process of abandoning Solaris. Java is probably Sun's future.

Strange pairing

[confusion]

Storagetek has had some pretty good products, but I can't see how this acquisition is going to help either company in the long term.

I used to be a big Sun supporter but they seem to be stuck in neutral lately.

A merger with EMC or Quantum would have made a lot more sense than this.

Jerry
http://www.syslog.org/

Re:Strange pairing

[Spectra72]

It gives Sun a ready made pool of sales people who understand how to sell storage. Sun's server-centric sales force has never really gotten that. Even though the Network Storage Division at Sun generates a lot of revenue with a relatively small employee base (less than 1000 people), it could be doing better if it had a better storage focused sales force. Sun's attach rate for it's own storage on its own Solaris Servers lags the industry standard. That's easy money if done even a few percentage points better. Sun has always worked closely with STK. STK is right down the street from Sun's Colorado campus. STK will help drive storage sales.

This also gives Sun a pool of tech support people who know how to support things in a heterogenous server environment, mainly Windows, but others as well. With Sun selling servers that are Microsoft Certified (the opeteron based ones for example), look for Sun storage to be attached to more and more Windows servers. Check out the Microsoft blogger with pics of Sun storage in Redmond if you doubt that.

EMC is obviously the big hitter in the storage arena, at the enterprise level at least. But of course, trying to aquire them would have been more expensive and also would have conflicted with current resale agreements with Hitachi. Doable? Possibly. But STK & Sun probably have a closer historical relationship that has had less bumps in the road. Sun has never really competed with STK, its always resold their tape libraries.

Profit margins

[sjbe]

I don't know much about finances in large businesses, but is 8.6% profit on sales considered good? Or is it just that in the case of Sun, any profit is good?

Depends on the business. For a manufacturing business a net profit of 8% might be outstanding. For a software business 8% net profit is pretty bad usually. In this case, 8.6% is pretty comparable to IBM's profit margin of 8.73% and IBM is a pretty darn good company.

Here's a new one

[jargoone]

Sun posted a loss last year (albeit a much smaller one than the year before).

I got it now:

1) Lose money
2) Lose less money next year
3) Profit???

Doesn't sound right...

Re:I for one welcome our new .com bubble

[njcoder]

This isn't that bad a move. Sun has a ton of cash and needs to start making some investments with it. Sun's storage solutions have been all over the map and hopefully the aquisition of StorageTek will solve that problem. With StorageTek and Tarantella they've really made some good moves in providing a full solution to future enterprise computing needs.

Ever since sarbanse oxly, storage has been a gold mie business. People need to store insane amounts of information now.

What sun really should figure out how to do though is do to storage what it's doing to servers with opteron processors. Otherwise that storage company Larry Ellison is funding is going to eat everybody's lunch.

P/E overrated

[sjbe]

Yahoo Finance shows Sun as profitable with a P/E of 19 right now...low for a tech company.

So? They aren't very profitable so we shouldn't expect a high P/E. They might be in the black but they only made $18 million in net income last quarter; basically breakeven on $2.8 billion in revenue. And they lost $147 million the previous quarter. P/E ratios can be useful but they are HIGHLY overrated as a means to compare companies. Plus their stock price is in the crapper at $3.76. Perhaps it's a bargin at that price but the market is pretty smart and companies as heavily traded as SUNW don't fall close to penny stock valuations because they are doing well.

Transition its business model to what? Sun has always sold (and resold) storage solutions.

There is a difference between reselling something and focusing on it. IBM used to make most of their money selling hardware. They've always sold services but now they focused on it. Sun has always sold storage but now it will be a MUCH bigger part of their business. Hence their business strategy will have to change.

I mentioned this to my boss...

[tweek]

and the first thing he said is "Do we have any StorageTek equipment?"

We don't but if we did, we might consider phasing it out now. He had lunch with McNeely at some CIO luncheon a few weeks back and came back thinking the man was a total idiot. He spent all the time railing against Linux and his competitors instead of talking up things that might make us consider Sun equipment.

Sun == Digital Equipment Corp

[Odonian]

I used to work for Digital, designing Alpha workstations. When they couldn't break a profit in that market, we fell back and concentrated on the higher-margin server market only. When that didn't work, we fell back again to making alpha-based storage servers.

The rest of course is history, wasn't long before the Compaq buyout, retirement of the Digital brand, and end of production of the Alpha chip altogether; ie total company death.

Sounds a lot like that.

A good deal

[0xABADC0DA]

ST has $1.1 billion cash, so Sun is really spending more like $3 billion. At $191 million profit that's over 6% return on their investment. Plus you have to expect sales to increase due to companies storing more data due to the recent demise of that accounting firm due to aggressively destroying documents.

Then you factor in the forthcoming zfs, which should make Solaris far better than any other operating system for handling mass data storage and they could do very well by this deal.

Re:A good deal

[flaming-opus]

You know I've done a lot of reading on ZFS, and I can't say it's likely to make that much of a difference. It's a journalled, 64-bit (yes they claim 128, but that's junk, as the underlying scsi layer doesn't support it), scalable filesystem. It has a few bells and whistles with indexing and access controls, but nothing that isn't already in a lot of other products. Basically it's catching up with where most other 3rd generation filesystems have been for years. It's probably not a bad filesystem, but I don't think it's going to bring about any major storage revolution.

Solaris (with Veritas filesystem and volume manager) has always been a good platform for archival storage. It's a good, stable platform for a database, file-serving, and the I/O capability of the machines is quite good. Where they really need to add value is on the software side of things. It's not enough to have servers, disks, and tape drives. Anyone can do that, buy it from dell even. What else are they going to offer? What will it cost? How well does it work? I don't think it's a bad combination, but it's two ho-hum companies combining into a larger ho-hum.

Re:Wait....

[Plutor]

Where I work, we're paying sub-$4k for single-unit dual-Opteron Sun servers, on top of which we're running Linux. On a simple performance-to-cost ratio, these are the best Linux servers out there. From an administration point of view, they are a pleasure to work with, and it's a downright transcendental experience when they fail. I love my SunFire v20zs.

Wish they bought Bea System Inc. instead.

[lost_techie]

For that kind of money, they could have bought Bea System Inc. Their valuation is $3.42 billion today.

Java is supposed to be Sun's big thing. And buying the #2 App Server company will go a long way in helping Sun in the java market. And help Sun improve its software business which I believe is higher margin than hardware.