EVENT FLASH

Sun Acquires StorageTek in Strategic Move to Double Storage Business

John T. McArthur, Crawford Del Prete

IN THIS EVENT FLASH

In this Event Flash, IDC analyzes Sun's proposed acquisition of StorageTek and the impact on Sun's position within the storage industry.

SITUATION OVERVIEW

On June 2, 2005, Sun Microsystems Inc. (SUNW) announced the acquisition of Storage Technology Corporation (STK) in a cash deal valued at $4.1 billion. The transaction, which is subject to regulatory approvals, is expected to close in the fourth quarter of 2005.

IDC believes that underlying this decision was an executive mandate to immediately and measurably grow Sun's storage business in the coming fiscal year, which begins in July. As margins on servers continue to erode, it has become critically important that systems providers deliver more of the total infrastructure solution, including storage hardware, software, and services, in order to maintain and grow revenue and profit. Sun's current storage business is notably smaller than its primary systems competitors, IBM and HP, both in revenue and when compared to the server business. For example, HP's disk storage systems business was almost 40% of the size of the server business in 2004, compared to Sun's 24%. Both IBM and HP have substantially larger storage services, storage software, and tape revenue as well. Notably, while the tape market is likely to experience relatively flat growth, the sustained revenue and profit pool remains substantial. With this acquisition, Sun will more than double the size of the company's storage software revenue and be well-positioned to capture a meaningful portion of the tape opportunity.

Among the options that Sun likely considered, IDC believes Sun made the best choice. Organic growth, acquisitions of intellectual property (IP) with limited installed base and revenue, and partnerships, even with industry leaders, are not sufficient to yield dramatic near-term improvement in Sun's storage business. This transaction satisfies any executive mandate for increased revenue, in this case more than $2B annually, immediately enhances earnings, and brings with it a considerable amount of IP. Sun has never been short on IP, having both developed and acquired sizable patent portfolios. Unlike earlier acquisitions, however, STK offers IP, direct product revenue, and annuity revenue from the installed base in the form of services and consumable tape media. Sun could have, in theory, acquired STK at a much lower price point, the company having traded at less than one-third the June 1, 2005, closing price as recently as the second half of 2002. However, the STK which Sun is acquiring is dramatically leaner and has a much fresher product line-up.

FUTURE OUTLOOK

This move by Sun signals a dramatic change, as the company moves from being futuristic and vision-focused to one which can solve the seemingly mundane, but very real, day-to-day operational challenges that companies face. While Sun has amassed a long list of acquired companies, prior acquisitions have been predominantly emerging technologies and immature companies at the beginning of their adoption curve. This acquisition might appear less exciting by comparison, however, the portfolio that StorageTek brings is both core to daily operations and provides Sun with significant revenue and profit expansion. StorageTek also provides access to key customers globally and increases the combined company's share of wallet. IDC regards this as the right move in a maturing market.

Interestingly, Sunﾒs market sweet spot has always been addressing the most complex computing and networking challenges, but storage has been harder for the company to address. By the very nature of this deal, the addition of the StorageTek sales force dramatically increases the combined companyﾒs ability to support customers and partners in complex storage sales situations. Sun's near-term focus should be on insuring the successful integration of StorageTek, including the rationalization of the combined sales, channels, and services strategies. Some relationships, like those with GEAccess, a partner of both Sun and STK, will likely experience no disruption. Others, like STK's recently announced OEM relationship with HP, may be more challenging, though IDC notes the existing relationship between HP and STK is multi-dimensional and includes tape heads, tape drives, and tape automation. Sun should also look to leverage the expanded portfolio of data protection solutions, both announced and in the pipeline at STK, for growth opportunities in information life-cycle management and infrastructure to support legal and regulatory compliance initiatives. Finally, Sun should identify additional, high-leverage revenue and associated profit streams. IDC believes that Sun can find opportunity in integrated systems, storage and network management. While Sun could continue to rely on partners, we do not believe this will grow the revenue stream fast enough. BMC and Computer Associates are possibilities, having between them both core technology and revenue in systems management, security, and data protection. Both have a significant dependency on IBM zOS mainframe platforms for revenue, which prior to the StorageTek acquisition was not obviously synergistic, but which looks more attractive in light of this acquisition.


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