Sun Micro-StorageTek Merger Warrants Mixed Reviews

Once a high tech high flier, now-struggling hardware maker Sun Microsystems (SUNW) hopes its planned $4.1 billion acquisition of StorageTek (STK) will help boost its languishing $3+ stock price. We can judge this deal two ways, from a financial perspective and from a strategic perspective.

First, the finances. Sun will pay $4.1 billion in cash ($37 per share) for STK, which has over $2 billion in annual sales. Sun has a war chest of more than $7 billion in cash, so an all-cash deal makes sense since they have the financial flexibility to avoid diluting existing shareholders. Even better, though, is the fact the StorageTek has $1 billion in cash of its own, so the actual price of the acquisition of the storage business itself is more like $3.1 billion, which equates to about 16 times trailing twelve month net income. All in all, Sun got a good deal.

However, money isn’t everything. Since Sun Micro currently is 5 times the size of STK, StorageTek’s net income will only add about 6 cents to Sun’s annual EPS. The reason why its share price is under $4, though, is because the company isn’t making money on its $11 billion in annual revenue. Until Sun can boost margins and turn its main business profitable, investors will have a very hard time justifying bidding up the stock. The cash cushion was providing a floor with a lack of profits, but that cash has been decreased significantly.