Update: Sun to acquire StorageTek for $4.1 billion

WASHINGTON - Sun Microsystems has reached an agreement to acquire Storage Technology (StorageTek) in a move to beef up the U.S. computer company's storage and data management portfolio.

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Under the agreement announced Thursday, Sun will pay $4.1 billion for StorageTek. In turn, StorageTek investors will receive $37 a share in cash.

The acquisition is part of Sun's strategy to meet customers' needs to rationalize their data center purchases, helping them "free up time and dollars to focus on compliance, architectural integration, security and ... the bottom line," the company said in a statement.

Sun targeted its storage product line as a cause for weak financial results reported in April. Sun reported a net loss of $61 million for the quarter ending March 27, missing analyst expectations. Company executives said one problem was that the rate at which customers purchase Sun's storage products along with servers had dropped over the last three quarters. Sun competitors such as IBM have been selling storage devices with servers, but Sun has lagged in that market.

Though Sun created the NFS (network file system) protocol used in the NAS (network attached storage) market, it is widely recognized that the company has not matched the success of, for example, IBM and Hewlett-Packard at selling storage products with its server systems.

StorageTek and Sun had a close relationship before Thursday's announcement. StorageTek had a continuing OEM (original equipment manufacturer) agreement with Sun, starting in 1999. Sun has been StorageTek's largest OEM partner, offering StorageTek libraries under Sun's own StorEdge brand, according to StorageTek.

The products and services currently offered by Sun and StorageTek complement each other and will form one of the most comprehensive storage and data management portfolios in the industry, the statement said.

Sun currently offers a line of storage and networking products that includes the StorEdge 6920 storage system and a platform for virtualization and data services on almost any vendor's storage system.

StorageTek, in Louisville, Colorado, has launched a new line of data protection and intelligent archive products including its Storage Resource management software and virtual tape systems.

Scott McNealy, Sun's chairman and chief executive officer (CEO), said in a statement that the acquisition helps position Sun "to act as a consolidator in the IT industry."

"With this announcement, Sun solidifies its leadership position with the highest volume computing platforms, the most comprehensive data and identity management solutions and, when combined with StorageTek, an unmatched ability to earn the confidence of customers as they develop, deploy and manage information assets throughout their entire life cycle," McNealy said. "Together, the two companies enjoy financial strength, a complete systems offering, an impressive list of blue chip customers and global reach."

Patrick J. Martin, chairman, president and CEO of StorageTek, said in a statement that the merger will help both companies and their customers.

"By joining forces with Sun to form a combined enterprise with greatly enhanced technological, operational and financial resources, we are positioning that enterprise for accelerated growth and solid performance for years to come," Martin said. "I strongly believe that for StorageTek and all our constituents, this is the right transaction, with the right partner, for the right reasons, at the right time."

Chris Foster, a storage analyst at Technology Business Research in Hampton, New Hampshire, called the deal "a step backward" because Sun recently has been heading into the services market -- while StorageTek is more of a legacy storage and backup vendor.

"I expected Sun to make an acquisition in professional services or software, and I don't think StorageTek fits that profile. If they were going to spend $4 billion, I thought they would have bought a software company."

Banc of America analyst Keith Bachman echoed Foster's skepticism: "We question why Sun would buy a slow-growth tape company instead of a more rapidly growing software [company]," he wrote in a research note. He also questioned Sun's claims it will be able to tap into StorageTek's customer base; Bachman sees storage and server purchases as separate buying decisions.

Also, Technology Business Research's Foster said, StorageTek's margins of about 10 percent "aren't that great. I think that margin will be pressured."

Prudential Equity Group analyst Steve Fortuna deemed the StorageTek purchase price fair, but the deal a dud.

"[We] question the rationale of a transaction which reduces Sun's cash hoard by 40 percent and does nothing to reignite revenue growth or profitability," he said in a report. "We would rather have seen the company buy back a billion shares and fire 10,000 people."

At least one analyst sounded an optimistic note: Illuminata analyst David Freund called the acquisition a "huge leg up for Sun," which had fallen behind rivals in the storage market.

Sun's attitude about storage until recently had been that storage was just a feature of servers, Freund said. "The fact is, Sun [storage products] had been resource-starved as far as Sun corporate was concerned," he said. "Frankly, the storage organization had a credibility problem." He anticipates the deal refocusing Sun's attention and resources on its storage business.

Freund also sees the deal as a good move for StorageTek. There had been some confusion among investment bankers about StorageTek's product line, and the company might have lacked a large enough product portfolio to survive on its own, he said.

(Computerworld's Todd R. Weiss and IDG News Service's Stacy Cowley, in New York, contributed to this report. )