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"I'm a Believer in Quality"

Say what you will about the dismal performance of Sun Microsystems (SUNW) in recent years. But never dismiss the ability of Sun's chief executive and co-founder, Scott G. McNealy, to come up with a surprise now and then. It happened again on June 2, when McNealy put down $4.1 billion to buy Storage Technology (STK), the leading provider of tape-drive libraries used by big companies to archive much of their corporate data (see BW Online, 6/3/05, "Sun's Surprising Tale of the Tape").

A tired McNealy, who had stayed up all the previous night negotiating the final details, discussed the deal with BusinessWeek Computers Editor Peter Burrows. Here are edited excerpts:

Q: Was this deal a long time in the making?

A: Sun and StorageTek have been good partners for years, and we've been talking about doing something for a few months. But none of us got any sleep last night. These things always come down to the last nanosecond. We ended up signing the deal at 4:08 a.m., and we were on the air [in a teleconference with Wall Street analysts] at 5:15 a.m.

Q: Many analysts are questioning the strategic fit with StorageTek. Storage is an area where Sun has not performed well over the years.

A: I don't know why anyone should be surprised. We bought LSC Software for hierarchical storage-management solutions. That enables us to make tape look like just another class of disk storage. Pirus Networks lets us virtualize different kinds of storage arrays. And we just bought Procom a few weeks ago, to give us a network-attached storage story. Now, by buying StorageTek, we get access to a customer base of 17,000, including just about every mainframe customer in the world.

So we get to stick our nose under that [IBM-dominated (IBM)] tent. Thirty-six percent of the world's data is stored on StorageTek equipment. But the real thing this gets us is a confidence-inspiring, storage-specialist field organization that's been around for 35 years. These folks can help us move our products into EMC's (EMC) customer base. In recent years, those customers haven't wanted us at the table -- even though we have some products that are superior to EMC's. Now they may listen.

Q: Over the years, you've been outspoken about the dangers of doing big acquisitions. Why have you changed your tune?

A: I wouldn't call this a huge deal. The beauty of this is that they've been a huge partner of ours, and we've been a huge partner of theirs. There's very little product overlap. We can pretty much just staple our two price lists together [and start competing for customers]. And their headquarters is a drive and a five iron across the highway from our Broomfield [Colo.] operations. From a degree of difficulty point of view, this isn't petrifying to all of our employees.

Q: Still, analysts question why Sun would buy a slow-growth company, especially one whose main business, tape storage, has been in decline.

A: These analysts are looking in the rearview mirror. By the way, the tape market may do better than many people think, given Sarbanes-Oxley and HIPPA (Health Insurance Portability and Accountability Act).

But we're not looking to grow the tape business. We're hoping that [StorageTek's] storage specialists can help us sell more solutions. They get 97% storage-service attach rates. [In other words, StorageTek's salespeople almost always get customers to buy related services, such as extended maintenance contracts]. So it's a very solid, dedicated, and trusted sales team.

Q: Will some of StorageTek's longtime partners, such as Hewlett-Packard (HPQ), stop selling the company's gear now that rival Sun will be the owner? How concerned are you?

A: Only time will tell. But I think the relationships will all survive and thrive. We're a very partner-oriented company, and always have been.

Q: Most of the big market-share gains in storage have been by pure-play companies such as EMC and Network Appliance (NTAP) -- at the expense of server vendors such as Sun and HP. Can Sun reverse that trend?

A: I think the customers are getting tired of the best of breed. And you know what, the pure-play [network] directory company used to be pretty hot. Now it's Novell. Ten years ago, the leading pure-play word-processing company was pretty hot. Now it's Microsoft Office. There is a role for the consolidator, and we plan on being a consolidator. At some point, people get tired of buying just the landing gear, and decide they'd rather just buy a plane.

Q: You used nearly half of your cash to buy StorageTek. Can you be a major consolidator with your remaining cash? [Sun will have $4.5 billion in cash after the deal.]

A: Both Sun and StorageTek are generating hundreds of millions from cash flow each year. We have a bigger war chest than we need to run the business, and that's before synergies. You haven't seen nothing yet.

Q: Does that mean you'll be doing even bigger deals?

A: I don't predict. And no, I wasn't trying to indicate anything about the size of the deals we may do. In general, I'm not a believer in size. I'm a believer in quality.

Q: Some analysts expect that newly minted Hewlett-Packard CEO Mark Hurd might decide to streamline HP. If he decided to focus on services and sell off some underperforming businesses -- storage or server units, for example -- would Sun be interested?

A: What I think is that it's mankind vs. IBM Global Services. Anyone who wants to work with us to provide an open and multivendor alternative to IBM Global Services -- I'm happy to entertain the conversation.

Q: Would such a deal be good for Sun?

A: I think it would be good for the planet.

Q: Have you spoken with Hurd?

A: I called him to welcome him to [Silicon] Valley, and suggested we get together. But I've been busy, and I'm sure he's been busy. But we're more natural allies than we are natural enemies.

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