Sun/STK a waste? Let's look at the numbers

OK, $4.1 billion is a lot of money, especially when it's actual cash. But why is Don Tennant so incensed about the Sun/StorageTek deal?

Don thinks Scott McNealy could have invested those billions more wisely in a software company -- specifically, Don suggests, for $4.1 billion Sun could have bought Novell. Why Novell? To get control of SuSE Linux. Why control SuSE? Sun President Jonathan Schwartz believes IBM depends on SuSE to compete with Red Hat in the Linux space.

Let's set aside Schwartz's weird get-IBM-by-the-short-hairs rhetoric. Let's ignore the fact that if IBM wants Linux, it can get Linux from anywhere -- or launch its own branded Linux. The source code isn't hard to find.

Instead, let's look at the numbers. Buying Novell for $4.1 billion (which seems high, given Novell's current market capitalization) would mean paying $4.1 billion for a $210 million company. That means paying about 20 times what the company is worth.

Oh yeah, that would delight Sun shareholders. Announce that deal and McNealy's entrails would be flying above Sun's headquarters by sunset.

And what would Sun get for overpaying for SuSE by $3.9 billion? A Linux product line that would compete with OpenSolaris and that can't be transitioned to OpenSolaris. That means Sun would either be competing with itself or have to kill one of two expensive investments. Some strategy for going forward.

So if Novell would be a bad idea, that still doesn't explain StorageTek. But maybe the numbers do. Sure, StorageTek is big in a dying business, tape backup. But in that business, StorageTek is huge, a classic 800-lb. gorilla.

Run the numbers: About 5% to 7% of StorageTek's machines currently have Sun's name on them through an OEM deal. Another 5% to 7% have HP's name on them.

So what does Sun get from this deal? For one thing, its name in front of the other 86% of StorageTek customers. Getting that foot in the door has been a nightmare for Sun since the end of the dot-com boom.

Sun also gets to disrupt HP's OEM supply, since HP is likely to stop rebranding StorageTek gear once the Sun buy is complete. That's a classic Sun tactic. HP customers who like the equipment more than the HP brand will be available for a Sun sales pitch.

And of course StorageTek does have positive cash flow -- which, even with smallish margins and a certain number of customers that will be lost after a Sun buyout, will still boost Sun's total sales.

All this sales-oriented maneuvering isn't very appealing to IT industry pundits. It's too tactical. They want dramatic strategy plays that promise to revolutionize the game, not incremental adjustments like this.

But Sun doesn't need a new strategy. Sun needs sales. Otherwise, it might not be long before somebody else is shelling out a few billion to scoop up Sun.

(Full disclosure: I have no financial connection with Sun Microsystems, though I know a few people who work there. And considering how often I've hammered Sun in the past, I have to view any case where I'm defending a Scott McNealy business decision as yet another warning sign of the Apocalpse. Reader discretion is advised.)