Sun plans to spend US$4.1 billion of its US$7.4 billion in cash and marketable securities on StorageTek in a deal expected to close by late summer or early fall. Even with the US$1 billion in cash StorageTek will bring, Sun will have a hard time affording any comparable moves.
Sun is trying to rebuild its primary business, selling powerful networked computers called servers, and is trying to elevate its software products with an open-source revamp. The StorageTek acquisition, however, shows that Sun believes storage is the business where it can get the most bang for its buck.
StorageTek has a stable business, and its sales force of 1,000 will more than triple what Sun has devoted to storage, said Mark Canepa, Sun's executive vice president of storage, in an interview. And that sales force will help Sun show off other products such as servers and identity-management software to choice StorageTek customers with IBM's mainframes. "In Big Blue accounts, they can go open doors," Canepa said.
But what the acquisition doesn't provide, at least immediately, is the revenue growth Chief Executive Scott McNealy said is a top priority. That bothers some on Wall Street.
"We do question the rationale of a transaction which reduces Sun's cash hoard by 40 percent and does nothing to reignite revenue growth or profitability," Prudential analyst Steve Fortuna said in a report Thursday. "We would rather have seen the company buy back a billion shares and fire 10,000 people."
And Bear Stearns' Andy Neff also questioned the wisdom of the move. "Given the weak growth outlook for tape, we don't see strategic benefits for Sun from this acquisition," though buying a company that will boost earnings per share is a good use of cash, he said.
StorageTek was profitable in its most recent quarter, reporting net income of US$23 million, the same amount as in the year-earlier period. But the US$499 million in revenue StorageTek garnered in the quarter ended April 1 was a 3 percent decline from the US$515 million from the year-earlier quarter.
StorageTek said it expects better financial performance for the rest of 2005, though, and Canepa argues that data management is a fast-growing part of the computing industry. Sun said its own earnings will increase within 12 months as a result of the acquisition.
Neff estimated that, based on projections from analysts surveyed by First Call, StorageTek's net income will indeed rise and will likely reach about US$200 million for this calendar year.
3%
2%
