Sun Is Buying Storage Tech. Is That A Good Move?
Sun Microsystems Inc. announced that it will buy
Storage Technology Corp. for $4.1 billion in cash. The acquisition of
Storage Technology is expected (by Sun) to add about $2 billion to Sun’s annual
revenue of about $11 billion. Â
This is
Sun’s biggest ever acquisition. The move has been well met by some on Wall
Street, but a couple of analysts have come out with quite heavy criticism of the
deal. For my part, I think it’s a merger of two struggling companies.   Â
Sun last
reported earnings on April 14: Its server business was particularly weak, down
around 9 percent sequentially, as was the storage business, down 13 percent
sequentially. Although the server business at large appears to be slowing down
of all the major vendors — IBM, HP, Dell, a couple of the Asian players — Sun,
the weakest player, is the most vulnerable to this trend. Â
By buying
StorageTech, Sun is making a big bet that the acquisition will be the means to
do three things: increase Sun’s presence in the data storage market, which is a
relatively high-growth market, expand Sun’s product offerings to the enterprise
market, and deliver revenue growth — something Sun has lacked for a couple of
years now.
Sun has
had (in my opinion) too much cash lying around relatively unproductive: over $7
billion in cash and equivalents on its balance sheet, lying around relatively
unproductive. Just like Microsoft’s huge cash balance was unproductive, with
income on cash limited to something like the Treasury interest rate. So, in
theory the acquisition could be a more productive use for the cash.
I quite
like technology companies being vertically integrated to offer one-stop customer
shopping for IT products and services. (But then, it depends on what products
and how vertically integrated. Some companies go too far and try to be all
things to all people.) So, from this perspective the merger, if properly
integrated, could be positive for Sun, which has been in turnaround mode for the
last couple of years. If Sun can get more enterprise business by offering
storage, it’s possible this could also boost its server business. In theory.
However, I in
practice think this acquisition is more or less meaningless. When you combine
two one-legged cripples, you don’t magically get a strong two-legged creature.
From what I understand, StorageTech has been doing almost as badly as Sun over
the last five years. I’m not clear how combining these two companies fixes the
problems of either one — unless it becomes license to rationalize costs (and
headcount) with actual revenue. My view is that the Sun / StorageTech merger
could end up being like Hewlett-Packard and Compaq merger: the marriage of two
struggling companies will lead to one struggling company.
Furthermore,
acquisitions have often proven to be the method via which entrenched management
can hide the true underlying performance of their company for another year, or
even two. Sun’s performance has flagged for the last two or three years. Buying
StorageTech, and the subsequent accounting charges and write-offs, could serve
to hide the combined entity’s true performance. There will probably be layoffs,
and there will be talk of “operating synergies†expected to be achieved. But I
don’t see this leading to significantly higher revenue growth for Sun.
StorageTech will contribute some quantity of incremental revenue. But since
StorageTech’s revenue streams are not delivering high-growth rates, then an
ongoing and sustainable increase in Sun’s revenue growth rate seems less
likely.
I’d rather have
seen Sun further reduce its operating expenses (in part with additional
head-force cuts) and, even better, issue a dividend. Maybe even institute an
aggressive share buy-back program to soak up some of the excess cash. If Sun
management were to initiate a dividend, that would do something for the
shareholders. It would also express confidence by management that they can
replace their cash hoard instead of just burning it.
Technically, the
stock is still flopping and chopping in that channel. If there is a close above
$4.00 on above average volume, that would make it a buy. A close in that range
would show two things: 1) There is a migrating pattern of acceptance from the
crowd for their turnaround (price discovery is made clear and more buyers would
emerge); 2) The stock can resist two powerful sell offs (mid April/late April)
and has nowhere else to go but up. The variable in that trade is a breaking of
the channel and if that happens, then its looking more like a buy — technically
speaking.
Â
Melanie
Hollands
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