Why The Sun-StorageTek Deal Could Work

Will Sun Microsystems' decision to part with nearly half of its cash reserves to acquire StorageTek make it "one of the largest enterprise storage players on the planet," as chairman and CEO Scott McNealy put it? Probably a stretch. Is it a sign that Sun is desperate and had nowhere to turn other than to a slow-growing supplier of tape-archival systems, buying itself time before it ultimately implodes? Remains to be seen. But if Sun executes properly, there's upside potential for both companies and their respective partners.

No shortage of skepticism exists among pundits about Sun's move to buy StorageTek for $4.1 billion ($3 billion if you take into account StorageTek's cash reserves). Indeed, many on Wall Street have valid reasons to pan this deal, most notably due to StorageTek's declining revenue and unlikely prospects that the company will give Sun a meaningful lift to earnings during the next 12 months (though R.W. Baird analyst Dan Renouard sees earnings accretion of 5 to 10 cents per year). Also, while StorageTek's high-end tape-archival libraries are pervasive among major data centers, there's no obvious reason to believe that customers will suddenly be banging on the door for Sun's hardware or software as a result of this deal. "Sun's storage solution is pretty weak," says Eric Geslien, director of business development at South San Francisco-based All Points Networking, a Sun partner that sells its servers and software.

So, why the marriage? "There are upsides and downsides to every potential acquisition, but if the goal is to double the size of your storage business, and that's what the goal was, they did it," says John McArthur, who heads up IDC's storage research practice. Adds Tony Asaro, an analyst with Enterprise Strategy Group, the deal puts Sun more in line with IBM and Hewlett-Packard as a full provider of data-management solutions. "It makes Sun more of a total solution provider," he says.

Creating Balance

Mark Canepa, executive vice president of Sun's storage products group, says filling out the company's data-management infrastructure is the "third leg of the stool," the other two being computation and middleware. "It has been clear for quite some time that data is a huge part of this equation," Canepa concedes.

Already considered a latecomer to storage, Sun officials late last year determined it needed to become more aggressive. That clearly wasn't going to happen organically. Among the options considered: trying to outbid Symantec for Veritas, making a bid for CA and acquiring Hitachi's storage business, IDC's McArthur notes.

"Some of these were virtually undoable," he says. Acquiring StorageTek, however, was a no-brainer, McArthur adds, because StorageTek generates cash and is in the throws of new product releases, and the barriers to entry among competitors are too high to pose competitive risks. "With 1,200 storage specialists, Sun is going to be in a lot better position to sell storage solutions than it was before, and could be much better equipped to support partners," he says.

StorageTek and its partners have a strong foothold in mainframe shops and with customers where Sun has not been historically dominant, notes Brenda Zawatski, general manager of StorageTek's ILMS business unit, which was established roughly two years ago to bring to market new products designed to help customers better establish data-retention and compliance policies. But some argue that in itself won't necessary endear customers to Sun's product line, though it gives the company a much more viable push into information life-cycle management (ILM).

While StorageTek's tape libraries "keep the lights on," as Zawatski puts it, its ILM products portend future opportunities, she says. Case in point: the company's recent launch of its IntelliStore 600, which it describes as the first intelligent data-archiving solution. The disk-based appliance with tape subsystem uses an internally developed policy engine and can connect to any enterprise storage; capacities range from 2 TB to multiple petabytes on ATA-class disk drives. It also can connect to any back-end tape of primary storage system via Fibre Channel (an iSCSI implementation is on the road map as well). Analysts say it gives StorageTek a product that will compete with IBM's DR550 system, EMC's Centera and NetApp's new IntelliStore line, though StorageTek's offering is optimized for both disk and tape.

But, as Canepa sees it, that's just the beginning. With Sun's identity-management tools, the combined company will be able to further secure and provide better audit trails of archived data. "If someone sends you a piece of data and then denies having sent it to you, you can prove to them that they have, in fact, sent it to you," Canepa says.

All well and good, but did Sun need to shell out $3 billion to gain a better foothold in storage? Some say it had no choice'the cash StorageTek generates from its bread-and-butter business minimizes any short-term risk, they argue, while giving Sun much-needed storage professional sales and service engineers, as well as intellectual property in the growing field of ILM.

What about the impact on the companies' partners? Scott Robinson, CTO of Datalink and a StorageTek and Hitachi Data Systems partner, says he is giving the deal the benefit of the doubt, even though he was once a Sun partner in a relationship "that never gained much momentum."

"To the extent this helps [Sun] build out a more comprehensive ILM strategy, we would definitely take a look at them again," Robinson says.

In the end, Sun's expensive gambit shows a quantifiable commitment to storage, says Mike Kahn, an analyst at the Clipper Group. "The biggest problem that Sun had was customers didn't see them as a serious player in storage," he says, adding that critics shouldn't discount the opportunity ILM will bring to Sun and the solution-provider community.