StorageTek acquisition fails to impress Sun competitors

Rivals, analysts claim purchase will not have impact on storage industry

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By  Caroline Denslow Published  June 19, 2005

Sun Microsystems’ regional competitors were left unfazed by the company’s recent announcement to acquire Storage Technology (StorageTek) for US$4.1 billion (see IT Weekly 11-17 June 2005), saying it remains to be seen how the acquisition will impact the storage industry. Sun CEO Scott McNealy, who caused quite a stir before when he described the HP-Compaq merger as like “two garbage trucks colliding”, had the jibe fired back at him when analysts and other industry players expressed their disapproval about its decision to buy StorageTek, claiming that the takeover will not create significant benefits for Sun. In a research note published soon after Sun made the announcement, Merrill Lynch analyst Steve Milunovich said: “We’re neutral to slightly negative on the acquisition. Sun used US$3.1 billion of its US$7.5 billion in cash for a deal that doesn’t seem to accelerate revenue growth given that tape is a mature market.” Rival HP described the acquisition plans as an unwise investment. “Between yesterday’s US$50 million ad spend and today’s acquisition, Sun is spending money like there’s no tomorrow — and for Sun that present challenges,” said Mark Hudson, vice president of marketing for the enterprise storage and servers business unit at HP. “This acquisition depletes half of Sun’s cash hoard — money they’ll need to survive in the long run,” added Ashraf Helmy, StorageWorks product marketing manager, HP Middle East. “Sun’s server market share continues to decline, and this acquisition is in an area of storage that does not promise high growth over the long term.” EMC, on the other hand, described the purchase as the company’s effort to improve its market share. “This deal is largely about Sun’s need to return to profitability,” said Mohammed Amin, EMC Middle East’s regional manager. “It may be a comfort to them but it remains to be seen how relevant the acquisition will be to the storage industry or customers. It doesn’t help Sun come to terms with the fact that the lion’s share of revenue growth in the tech industry today is going to focused best-of-breed providers like EMC, SAP, Oracle, Intel and Cisco.” According to analysts, both Sun and StorageTek are facing frightening market decline in their core businesses and are just hovering below or just above breakeven. “StorageTek has averaged 0% revenue growth (excluding currency) over the last five 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 eight major storage players over the last several years, suggesting that this is a pairing of increasingly marginalised players.” “These are two struggling organisations banding together. Sun has not been profitable on a yearly basis for the last four years, and StorageTek has been at approximately US$2 billion in revenue for at least the last five years,” Amin added. “Specific to storage, Sun has had declining revenue and market share in external storage systems for the past eight quarters, according to IDC. Additionally, StorageTek has accounted for only one point of market share in the external RAID (redundant array of independent disks) market during 2002, 2003 and 2004.” The planned buyout also caused speculations about the fate of StorageTek’s reseller agreement with HP, but according to Helmy they don’t expect the news to affect their OEM relationship with StorageTek. However, Helmy admitted that they plan to leverage on the initial customer confusion brought about by the integration of the two company’s organisations and product portfolios. HP plans to build upon its recently enhanced StorageWorks portfolio, in particular its information lifecycle management (ILM) services and solutions (see IT Weekly 28 May - 3 June 2005). This includes HP’s reference information storage system (RISS), tiered storage and tape storage offerings. “HP is very well positioned to compete against a combined Sun/StorageTek portfolio of storage products. HP’s comprehensive portfolio of ILM offerings will continue to help customers unlock the value of their information,” Ashraf concluded.

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