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Sun Microsystems shocked investors and customers today by announcing that it will acquire StorageTek for $4.1bn.

Sun has offered up $37 per share in cash for each StorageTek share - an 18 per cent premium. The storage maker's shares started the day at $31.23 per share and then shot up more than 15 per cent to $36.41 the moment Sun's buy was announced. Shares of Sun dipped slightly to $3.80 at the time of this report. Sun expects the deal to close in late Summer or early Fall.

This acquisition eats up a huge chunk of Sun's close to $7bn in cash. (StorageTek arrives with $1.1bn in cash of its own, which is a nice boost for Sun.) The company, however, has long struggled in the storage market and could use some help. It has watched as rivals EMC, HP and IBM sold tons of storage attached to its Solaris boxes.

In addition to bolstering its storage business, the move gives Sun a much-needed marketing boost. It has been languishing for some time as its tries to revitalize its server and software businesses.

StorageTek could well push Sun toward near-term profitability. In its recent quarters, Sun has ended up just below break-even. StorageTek, by contrast, posted income of $23m on the back of $499m in revenue during its most recent quarter. The company reported $2.2bn in revenue and net income of $191m in 2004.

"This is not an acquire and turnaround situation," McNealy said. "(StorageTek) is generating cash and making money."

Executives from both companies refused to present a management structure for the combined company. But StorageTek's CEO Patrick Martin vowed to keep his 7,000 person firm's presence in Colorado high. StorageTek has been operating out of that state since 1969.

This deal gives Sun one of the leaders in the tape storage and data backup market. StorageTek has deals with a wide variety of storage hardware makers, and executives from both companies pledged to maintain such relationships.

Sun has focused on selling SAN (storage area network) and NAS (network attached storage) systems and related software.

In the future, the companies want to create common software products and to nail the storage market that centers around regulatory and compliance issues. Recent regulations have pushed storage vendors to create a wide variety of compliance gear.

Sun also plans to give the typically quiet StorageTek a more vocal marketing edge.

"We can go take our megaphone, and we believe gain some share in the market," McNealy said. "At least, that's our game plan."

A cynic would suggest that Sun has acquired a dinosaur with only little prospect of nailing future, high-growth areas. Tape isn't dead as some would suggest, but it is being punished by disk more and more every year. In addition, Sun's storage performance has been so poor that one wonders if it can make good use of the StorageTek assets.

On the other hand, this deal gives Sun a new channel to sell both storage and servers. Sun has acquired the right to converse with thousands and thousands of IBM, HP, EMC and Dell customers where it might not have had its own accounts.

In addition, this evens out Sun's hardware play, making it very significant throughout the data center.

A braver, more exciting move would have been for Sun to merge with EMC and really give the likes of IBM and HP a run. That, however, would have required Sun to give up much of its independence, which is not something McNealy has ever seemed interested in or willing to do. ®

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