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Sun critics hear the sound of two garbage trucks colliding
Is StorageTek buy a waste?
Analysis For years, Scott McNealy's comical, sarcastic, controversial mouth has produced a flood of press for Sun Microsystems - often more press than the company's size deserved. But one particular item from McNealy's acerbic repertoire could haunt Sun as it waits for the freshly announced StorageTek acquisition to close.
"It's like two garbage trucks colliding," McNealy used to say of the HP and Compaq merger. Reporters, analysts and Sun fans enjoyed this quip, passing it around IT circles for months.
Now, however, the jab has been fired back at McNealy by analysts already sour on Sun's $4.1bn storage acquisition.
"If Sun management called the HP/Compaq merger the collision of two garbage trucks, what is a Sun/Storage Tech combination?" Merrill Lynch's star analyst Steve Milunovich asked himself in a research note published today. "We're neutral to slightly negative on the acquisition. Sun used $3.1 billion of its $7.5 billion in cash for a deal that doesn't seem to accelerate revenue growth given that tape is a mature market."
The early cry has the Sun/StorageTek deal pegged as a marriage of losers. On one hand, you have the depressed, former server king thumping down a multi-billion dollar storage bet. On the other, you have a slow growing tape storage-focused relic. Both companies face frightening market share losses in their core businesses and hover just below or just above breakeven. In short, not the type of union shareholders moisten over at night.
"StorageTek has averaged 0 per cent revenue growth (excluding currency) over the last 5 years, and we believe that the tape market will face increasing pressure going forward from low priced disk archive solutions," wrote Sanford C. Bernstein & Co. analyst Toni Sacconaghi in a research note. "Moreover, we note that Sun and StorageTek (along with HP) have had the slowest storage growth rate among the 8 major storage players over the last several years, suggesting that this is a pairing of increasingly marginalized players."
Yesterday, executives from Sun and StorageTek argued that their union makes much more sense than analysts would have you believe. They see StorageTek giving Sun an immediate storage sales force boost. Sun has long struggled to move storage kit, so any help in this area would be welcome and help from a trusted backup name is golden. Via tape, McNealy and Co. will secure chats with storage customers that have belonged to IBM, EMC, HP and Dell.
In total, Sun looks like a balanced data center player by having a storage business more comparable in size to its storage efforts, and StorageTek does no damage at all to Sun's profitability quest.
Longer term, Sun hopes StorageTek can help it carve out a big piece of the higher-growth ILM (information lifecycle management), storage management software and regulatory compliance markets. Exactly how this will be done by a traditionally anemic storage player - Sun - and a tape-centered dinosaur isn't clear. But, this could pan out, which would be nice.
Numerous pundits expected Sun to make a more forward-looking purchase by picking up a software maker such as Sybase or BEA. No such luck. Instead, Sun stuck with the familiar and went the hardware route. Now, it's left with around $4.0bn in cash, no flash and countless analysts wondering if Sun can be revived or if its last gap was a dull one.
It's just about impossible to say how the new Sun will shake out. The true nature of this deal won't become evident for a couple of years.
In the meantime, however, a couple of things are certain. Sun didn't return cash to investors, kick off a massive layoff session or acquire a software company as the more pragmatic types would like. Its contrarian buy has guaranteed several months of negative reports and stories. And the timing couldn't be worse. Sun just unveiled a new marketing campaign, complete with a new "S" symbol and the shockingly horrific "Share" slogan.
We tend to compliment Sun for not doing what the market expects. For not firing thousands of workers just because Wall Street says it's a good idea, for not giving up on innovative ideas, for not giving in to monopolies (unless they give you enough money) and for not backing down from spending on R&D. Too many companies cower in front of investors, pleasing them in the short-term instead of thinking about long-term gains. Along those lines, it could well turn out that Sun made the right call by doing the unexpected. We're willing to wait and see. Sun has a pretty remarkable track record over the past couple of decades.
Still, here's hoping McNealy really, really liked that garbage truck joke . He's going to hear it a lot because this deal doesn't seem to make much sense on paper. ®