The sun sets in Louisville (CO)

Posted on July 01, 2005

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The Sun-StorageTek deal is still causing crowds at water coolers and more than a little confusion and consternation among the companies’ customers, channel partners, and financial analysts.

In one of our cover stories this month, we checked back with Mark Canepa, executive vice president of Sun’s Network Storage Products Group, to get some post-announcement comments in the hopes of shedding some more light on this surprising blockbuster. I’ve also read most of the comments from other Sun luminaries, including Scott McNealy and Sun president and COO Jonathan Schwartz (who addressed the deal in a blog, http://blogs.sun.com/roller/page/jonathan-see June 6 entry).

This I know: It’s not about tape.

On the business side of the deal, StorageTek (well, their shareholders, at least) makes out great. And some of what Sun gets mitigates the $4.1 billion sticker price-most notably approximately $2 billion in annual revenues, $1.3 billion in cash, about $1 billion in annual services revenues, 17,000 customers and partners, positive cash flow, cost-cutting synergies, and 1,000 storage-savvy salespeople who camp out at very large accounts (or at least in the pro shops close to those accounts). And don’t underestimate the value of storage-savvy salespeople to a company like Sun.

But if you look at it that way, Sun is merely trading its own cash for STK’s cash.

So, let’s look at the bigger picture (in Sun’s view): It’s all about high-fallutin’ horizon-level concepts and architectures, most notably grids, information life-cycle management, and, eek, something called an “information ecosystem.” Fine, but I don’t think StorageTek adds anything to the grid picture, which, to hear Sun describe its grid strategy, should be more aptly called “gridlock”-“one throat to choke” equates to “one-stop shop,” which means “vendor lock-in.” Fat chance of controlling entire data centers when you’re going up against EMC and IBM. Not to mention Hitachi (which sells through Sun and Hewlett-Packard) and HP (which resells StorageTek’s tape libraries and Hitachi’s high-end disk arrays).

Same goes for ILM. Putting StorageTek into Sun’s grand scheme of being a soup-to-nuts player in the ILM space means only that Sun now has nuts.

The main course in the ILM soup-to-nuts feast is software. The hardware is a commodity element. So if ILM is the raison d’etre for the acquisition, why didn’t Sun load up on storage software companies? You can get many innovative start-ups for $4.1 billion. Heck, you can probably get all of them. (And of course we know that every single storage software vendor is an ILM player, right?)

As financial analyst Steve Berg says in our cover story, “What would allow this acquisition to make more sense is if Sun went out and added some storage array and storage management software technology to give them a clearly defined and defensible ILM solution. They could then define themselves as a ‘technology supermarket.’ ”

I agree. The StorageTek deal isn’t enough: Sun has some more shopping to do to fulfill its apparently lofty goals. And they still have about $3.4 billion in cash left over.

If you’re an end user, this acquisition will probably not affect your purchasing plans at all. But if you’re in the channel and/or you do business with Sun/STK and any of their competitors you probably have some thinking to do.

Can Sun shoot the moon? No, but it may have bought its way into shoring up its sagging storage business.

I think that with some of these multi-billion dollar deals (e.g., Sun-STK, Symantec-Veritas, EMC-Documentum), the storage industry may be exhibiting a bit of undue hubris. In the context of Sun, think Icarus.

If you want to see some mergers and acquisitions that make a lot more sense, look for some action in the midrange disk array market, which is too crowded. I’m talking about vendors such as Engenio (which sells arrays to StorageTek and Sun and IBM and others), Dot Hill (another Sun supplier), and Xyratex (which sells to Network Appliance and others). Not to mention Adaptec, Infortrend, and a host of other disk array vendors. If hardware is a commodity (and midrange and low-end disk subsystem are awfully close to it), then this is where the consolidation needs to take place.

Another space that’s ripe for some consolidation is the SAN switch market. There are only four vendors, plus a few start-ups, but my storage-focused friends in the financial analyst community tell me that’s one too many. Place your bets.

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Dave Simpson
Editor-in-chief


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