Sun Micro to acquire Storage Technology

Buyer's big cash reserve to cover $4.1 billion price

June 03, 2005|By NEW YORK TIMES NEWS SERVICE

SAN FRANCISCO - Sun Microsystems said yesterday that it will acquire the Storage Technology Corp., a maker of tape storage systems and disk drives, for $4.1 billion in cash, to broaden Sun's reach into the high end of the corporate computing market.

Sun will pay $37 a share, an 18.5 percent premium over the closing price Wednesday, and will assume Storage Technology's employee stock options.

Although Sun and Storage Technology overlap somewhat with their disk-based data storage systems, the resulting company, with revenue over $13 billion, is likely to be more attractive to large business customers increasingly concerned with archiving and securing business data in the face of new regulatory restrictions.

Positive reaction

Financial and industry analysts reacted positively to the acquisition, agreeing that it would strengthen Sun's hand in the crucial large corporate markets.

But Sun's stock price declined when the markets opened after the deal was announced, ending down 11 cents, at $3.79 in trading on Nasdaq. Storage Technology's stock rose $5.13, to $36.36, on the New York Stock Exchange.

Sun, based in Santa Clara, Calif., has been struggling to resume growth after a steep decline that started with the dot-com collapse.

Its revenue peaked at $18.25 billion in 2001, but dwindled to $11.18 billion last year. Sun has had financial losses in each of the last three years.

Victim of bust

The computer maker, for decades emblematic of Silicon Valley's fast growth, found that as the beneficiary of the telecommunications boom in the 1990s, it was also one of the biggest victims of the bust that followed.

At the same time, however, it has maintained a significant cash reserve, and yesterday it used a large portion of its holdings in an attempt to create a more effective competitor against companies like IBM, Hewlett-Packard and EMC, which sell large data storage systems to corporate customers.

Sun retains about $4.5 billion in cash and investments after the acquisition, which was valued at about $3 billion net in light of Storage Technology's cash balance.

"I do think it makes sense," said John T. McArthur, a senior vice president at IDC, a market research firm.

"Sun has to find a way to tell a different story, and this permits them to say, `I can deliver a complete set of integrated pieces.' "

The acquisition should also extend Sun's ability to sell its server products into new markets with help from Storage Technology's sales force.

Payroll to swell

In an early-morning conference call held to announce the deal to analysts and reporters, Sun's chairman and chief executive, Scott G. McNealy, said the acquisition would effectively add 1,000 sales representatives and several thousand field-service employees to Sun's work force.

"This takes us to a new level of scope and scale," he said. "It makes us one of the largest enterprise storage players on the planet today."

Storage Technology, based in Louisville, Colo., with 7,000 employees, had revenue of $2.22 billion last year and net income of $191 million.

It is known for its robotic tape handling systems, which are vastly less expensive than disk-drive systems for the storage of archival data.

Competition

Disk drives are beginning to compete with tape storage alternatives in many applications because of speed and convenience.

Storage Technology's chairman and chief executive, Patrick J. Martin, defended his company's tape business and said its new products were growing strongly.

"We still see the tape library business growing," he said. "For the operators of large systems, this is highly critical. You want to get data off of disks because of the expense."

McNealy pointed to opportunities in helping large companies comply with the Sarbanes-Oxley Act and the Health Insurance Portability and Accountability Act, which impose tight controls on access to companies' computerized information.

Financial analysts said that while Sun had a good product strategy, it was running out of time to show new growth, and that the next six months would be crucial.

After showing some progress last fall, when Sun introduced a new version of its operating system, its stock plunged after the company failed to meet Wall Street predictions during the December quarter.

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