StorageNetworks Will Give Up and Give Back

The storage-for-hire company made the tough decision to go out of business and hand back its cash.
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Updated from 2:33 p.m. EDT

Shares of

StorageNetworks

(STOR) - Get Report

surged today on news that the companyhas decided to close up shop for good. The stock wasup 18 cents, or 14%, to $1.46 in midafternoon trading.

In the wake of the decision, StorageNetworks saidit will lay off most of its 60 employees, save for asmall transition team. CEO Paul Flanagan will leavethe company immediately.

The liquidation comes after StorageNetworks hadspent the past two quarters scouting unsuccessfullyfor a buyer. However, today the company saidinterested buyers were willing to pay only an amount lessthan its liquidation value. As of June 30, it claimedcash, restricted cash and investments of $201 million.

Searching for a way to stay in business,StorageNetworks also considered buying up othercompanies or technologies. But its board of directors ultimately decided the best way to maximize shareholder value was to shut down and give the excess cash to shareholders, according to a statement from Flanagan.

The company estimates it will be able todistribute about $1.60 to $1.70 per share tostockholders.

News of the shutdown didn't come as a hugesurprise, given the extent of the company's businesstroubles.

StorageNetworks played in a niche storage marketas a storage-service provider, offeringoutsourced storage services to its customers as wellas professional consulting. But the business fellon hard times after the late '90s, says Pacific Crestanalyst Brent Bracelin, who characterizes the arena asa "leftover from the bubble era."

"It was a hot market ... there were, I think, morethan 30 companies chasing that space

at one time.But they've all essentially folded," he says. Bracelindoesn't formally cover StorageNetworks (whichcurrently merits coverage from only three analysts),and his firm hasn't done any banking for the company.

"I've had their obit written for a while," says Adam Couture, principal analyst for storage services at Gartner, noting that in the past two years, eight out of 13 storage service providers had either been acquired or gone out of business. Meanwhile, big, diversified companies like

IBM

(IBM) - Get Report

and

EMC

(EMC)

are pushing more aggressively into storage on demand models, he notes. "It's kind of sad that just as this concept is getting traction and taking off, StorageNetworks had to bow out. They were the pioneer in this."

In its core business, StorageNetworks ran intoboth technological and competitive hurdles. Thetechnology to offer storage as a utility remainsrelatively immature -- and within that market,StorageNetworks was competing against the likes of IBM global services,

EDS

(EDS)

, and

AT&T

(T) - Get Report

.

"You had some very large companies as competitors, with much stronger balance sheets," says Bracelin.

In light of weak demand for storage outsourcing, StorageNetworks sought to exit that line ofbusiness and transform itself into a software andconsulting company. On June 30, the company announcedit had achieved the goal outlined in the first quarterof easing out of the managed-services business. At thetime, it had cut 35% of its workforce.

But CEO Flanagan said it would simply have burnedup too much cash if it had stayed in business sellingstorage software. "Even if we were to emergesuccessfully from the crowded field of competitors,which includes all of the major storage technologycompanies, the realization of a meaningful return onthis investment is uncertain and could take years," hesaid in a statement.

The board of directors' decision to shut down thecompany is highly unusual, but could become less so,notes Bracelin. "From a compliance standpoint there ismore pressure on board members to take a hard look ata business and to make an assessment of whether thisis a good business for investors. I thinkyou'll see more and more companies doing that," hesays.

For the quarter ending in June, StorageNetworks managed to reduce the flow of red ink, posting an operating loss from continuing operations of $3.8 million compared to $10 million last year.

But the top line was in a free-fall. Sales in managed services fell to $15.2 million in the June quarter, including nonrecurring revenue of $4.5 million, down from $22.4 million a year ago. Revenue in software and services plummeted 75% to $327,000.