Sun looking to add market heft

Sun Microsystems’ proposed acquisition of StorageTek for US$4.1 billion is a bold move that makes sense, however it carries some elements of risk. Corporate customers tend to either buy storage products from their server vendors or they seek out storage specialists. Did Sun spend its cash wisely?

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By  Sarah Gain Published  June 27, 2005

|~|sun-logo-new-BODY.jpg|~||~|Under the agreement, Sun will pay US$4.1 billion for Colorado-based StorageTek. In turn, StorageTek investors will receive US$37 per share in cash. The result, according to Sun and StorageTek, will be a stronger company, which will offer a wide range of data management services and storage solutions.

“Combining the two companies brings a new level of scale and scope on a global basis. The merger will boost Sun's sales force by more than 1000 people and add thousands of service and support personnel,” says Sun CEO Scott McNealy.
However, there are no significant changes planned in the product road maps of the two companies, according to McNealy.

Sun’s proposed acquisition has received a mixed reaction. Industry analysts say the two companies had little choice but to make a significant move. Sun had to do something to boost storage business and its overall market position against rivals such as IBM and Hewlett-Packard. Which company will ultimately benefit the most from the deal remains unclear. Bob Abraham, an analyst at US-based Freeman Reports, is not predicting changes at Sun.

Abraham says it is likely Sun will keep the two firms separate for a while to maintain stability and retain the customer base. "Users have to take a wait-and-see attitude. It is unlikely there will be [immediate] major changes. It may be several years before the dust has settled. It is like when HP and Compaq merged. Some changes occurred, but it takes a while for everyone to understand what is necessary in order to execute those plans," he says.

However, other US analysts feel differently. Chris Foster, a storage analyst at Technology Business Research, says the deal is likely to be a step backwards in Sun's efforts to boost its IT services business. "I expected Sun to make an acquisition in professional services or software. I do not think StorageTek fits that profile," says Forster.
||**|||~|StoragetekLogo-BODY.jpg|~||~|The tape storage market is declining; hence the need for StorageTek to move into the disk space. The company, which has over 7000 employees, secured US$2.2 billion in revenue in 2004. However, the growth remained slow.

According to Enterprise Strategy Group, the slowdown is due to the fact that 18% of corporate end users have already started replacing their tape libraries with disk subsystems and 58% of those users polled plan to replace some or all of their tape systems with disks. StorageTek has been trying for some time to shake its image of being a supplier of digital tape storage systems.

It has released storage management software applications and disk subsystems, including a disk array that emulates a tape library to an application server. Sun is developing its own disk storage subsystems but has had little success competing against industry stalwarts such as HP, EMC and Hitachi Data Systems (HDS). Sun’s storage business has steadily declined over the past three years, says Brian Babineau, an analyst at Enterprise Strategy Group.

StorageTek already has long-standing original equipment manufacturer (OEM) agreements with both Sun and HP. According to Enterprise Strategy Group, StorageTek secures 5% to 7% of its revenue from these deals.

This may not be indicative of strong loyalty to Sun, with StorageTek favours being split evenly between the two competitors, but to Graham Porter, marketing manager at Sun Middle East and North Africa, this is a firm enough basis for a multi-billion dollar deal: “We have been selling StorageTek solutions for 20 years. We have a lot of joint customers and partners and enjoy a strong [business] relationship. This is a logical extension to our business with one of our oldest suppliers,” he says.

There is optimism within Sun, although whether this optimism is well placed is debatable. Porter’s view the acquisition will “give customers a more end-to-end solution with more products from the same vendor,” has the danger of possible vendor lock-in, despite his reassurance that customers need not worry about proprietary standards with Sun.

However, despite the uncertainty, the deal has advantages. It will add to the solution Sun offers in the data centre. The vendor claims the move will provide a better perspective of its data centre customers and their business requirements.

“EMC, for example, has been a pure storage player and Sun would argue that it does not understand the rest of the picture as it does not look at things like infrastructure software that Sun does, and it does not do anything around servers,” Porter explains. The move will also give Sun the opportunity to enter new markets. The mainframe market, where StorageTek was originally providing tape solutions, has long been a market in which Sun has operated. “This will give us a much bigger footprint in the IBM mainframe market. The deal brings new business to the table,” he adds.
||**|||~|Scott-McNealy-BODY.jpg|~|The combined company will bring a new level of scale and scope on a global basis, says Sun’s McNealy.|~|However, the Middle East partners and customers of the two vendors remain cautious, acknowledging that while the deal opens up significant new sales avenues for Sun in the fast-growing storage arena, it also throws into doubt several of StorageTek’s existing OEM relationships.

“The deal came as a surprise. We have to watch for the reactions from Sun’s OEM storage partners and StorageTek’s OEM partners as well,” says Sudhakar Suryanarayan, sales manager at StorageTek distributor StorIT.

StorageTek partners view the move as a step in the right direction. It will be a good partnership due to little overlap and the fact that it gives Sun the ability to address a fast-growing market. “Server margins continue to erode so the ability to provide a total infrastructure solution along with services is vital in order to grow revenues and increase market share,” says Jocelyn Al Adwani, partner and director of business development at storage specialist STME — a StorageTek partner in the Middle East.

With the storage industry growing faster than the server business, the proposed acquisition may be a smart move for Sun. However, understanding what the deal means for Sun’s product portfolio is crucial.

“We will certainly see a much stronger Sun offering in the tape space. It will give us a strong portfolio under a single brand. On the other hand we will not be able to position the products with non-Sun customers that easily. It would actually be great to get the products under the Sun label, but for them to also retain the old StorageTek brand,” says Christian Kroker, managing director of Enigmatic. The two companies’ approach to disk storage, which will have a considerable impact on partners, is yet to be decided. “StorageTek has compelling offering in the disk storage space than Sun. However, since that was an OEM agreement, I am not sure what they will be doing, which leaves a huge question mark in our business plans,” Kroker adds.

StorageTek has more than 200 clients in the region and cross-selling into this existing customer base will be a priority for Sun. While StorageTek partners are still unclear of the operational implications of the deal, Sun is confident it will be able to convince customers the acquisition is to their advantage, promoting consolidation of services and the benefits of a complete solution. Sun is hoping product diversification will help attract new customers. StorageTek has a 97% attach rate for services, which is a key area for Sun in the Middle East.

The vendor claims services take away the image of being seen as a pure product vendor to being seen as a solution provider. “We talk about the storage attach rate at Sun. This is the percentage of times that when we sell server solutions we attach storage too. Globally the figure is at 35% mark. In the Middle East it has been approximately at the 45% mark. I think with this deal the storage attach rate will go up,” says Porter.||**||

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