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Sun Microsystems

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has tapped its piggy bank to buy a company with a huge installed base and a steady stream of recurring revenue -- and a core technology that has seen better days.

Sun and


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are billing their $4.1 billion cash combination as a way to match Storage Technology's tape backup products with Sun's high-end server and storage lines.

Because StorageTek has about $1 billion in cash on the books, the acquisition will actually cost Sun $3.1 billion. That will reduce its reserve by 42% and likely end speculation that CEO Scott McNealy is planning to take his company private or to agree to a huge share buyback. (Sun had $7.4 billion in cash and marketable debt securities on hand at the end of the March quarter.)

In the short run, StorageTek will certainly give Sun a quick revenue infusion. Last year, StorageTek earned $191 million, or $1.75 a share, on sales of $2.2 billion, including $917 million in service revenue. Sun sees the transaction as adding to non-GAAP earnings in the first 12 months after closing, which is expected to occur in the late summer or early fall.

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It's worth noting, however, that StorageTek's top line has been growing very slowly, increasing by just 8% since 2000 and 1.9% since 2003. The reason isn't hard to fathom: Tape backup is an old technology that is likely to be slowly phased out as faster, disk-based solutions come down in price. And that worries some on Wall Street. Sun shares had recently fallen 13 cents, or 3.3%, to $3.77, in Thursday trading.

"We question why Sun would buy a slow-growth tape company, instead of a more rapidly growing software company, particularly since Sun's management has not been aggressive on cutting costs to drive EPS," wrote Bank of America analyst Keith Bachman. "The opportunity cost of $3 billion to buy STK seems high to us." BofA has done investment banking for Sun.

What's more, a significant portion of StorageTek's customer base, which has been known as exceptionally loyal to the storage vendor, appears ready to switch to newer technologies, says Brian Babineau, a storage analyst with the Enterprise Strategy Group. According to a study that the Massachusetts-based consultancy conducted in March, 22% of StorageTek's customers have already moved some of their archival storage libraries to disk and another 58% said they were considering such a move.

That trend was not lost on StorageTek management, of course, and the combination with Sun could provide the R&D muscle to develop newer backup technologies that will help the combined companies hold on to customers, said Babineau.

Sun needs the help. Its storage business shrank by about 5.6% last year, while the overall market grew by 5%, according to market researcher IDC. And Sun's overall server and software business has never really recovered from the implosion of the dot-com boom. Although the company has made progress, largely through cost-cutting, it has not been able to grow its top line enough to satisfy Wall Street.

For the quarter ended March 27, Sun posted a loss of $9 million, or break-even on a per-share basis, on sales of $2.62 billion. During the same quarter last year, Sun lost $760 million, or 23 cents a share, on sales of $1.71 billion.

Something to watch for: defections from StorageTek's salesforce. "Keeping them on board is key," says Babineau. If not,



, which is already winning away tape customers with its Clarion products, could move in very fast.