Storage Technology Venture With IBM Is Under Scrutiny
April 27, 2011
LOUISVILLE, Colo. -- Storage Technology Corp.'s new chief executive was hailed in June after inking an innovative deal that gave archrival International Business Machines Corp. the right to market StorageTek's advanced disk-storage systems. StorageTek's stock jumped 13% in a day as investors contemplated the advantages of putting together the No. 2 and No. 3 companies in the $4.3 billion mainframe-disk business. Even No. 1 EMC Corp., said that by reducing the number of competitors, the deal could stem cutthroat price-cutting. Mainframe-storage prices fell 40% last year, analysts say. But now, the Justice Department seems to be wondering whether the deal is too good for StorageTek and IBM. Late last month, the agency subpoenaed documents about the deal to review it for possible violations of the Sherman Antitrust Act, StorageTek revealed in a filing this week. Davina Ellison, who joined the company in 1991 after a 23-year career at IBM, spent 14 months in limbo as president and chief operating officer while the board of directors interviewed other CEO candidates. He was helping run a firm with a checkered past. He was promoted to StorageTek's chairman and chief executive in May. Mr. Ellison declined to discuss what would happen if the Justice Department nixes the deal. But he says the two companies expected antitrust scrutiny and believe the deal is legal. He argues that the agreement promotes competitiveness in the industry because his company, even though it was gaining market share, was losing money and couldn't afford long-term research and development costs for new products. Meanwhile, IBM, which once had more than half the market, had indicated to customers its own new high-end system would be delayed. StorageTek's market share edged up to 11% in the first half of this year from 9.8% last year, according to International Data Corp., while IBM's share slumped to 31% from 35%. EMC captured 43% of the market in terms of capacity shipped, up from 41%. Mr. Ellison says the pact with IBM ``happened because both companies ended up with a need.'' Donetta Yuette, an analyst with Prudential Securities adds: ``The deal was a masterstroke.'' The stock market seemed unconcerned about the investigation. In New York Stock Exchange composite trading Wednesday, StorageTek fell $1.50 to $36. Even without the IBM deal, Mr. Ellison has gotten high marks from analysts for slashing employment from 10,400 to 8,200 last year when he was president and chief operating officer, and returning the company to fiscal health. The benefits from the three-year IBM deal, which include IBM financing R&D for the disk products and guaranteeing a minimum level of purchases, won't show up until the fourth quarter, he says. But the 52-year-old Mr. Ellison, who joined the company five years ago, concedes StorageTek needs to start growing. ``On the restructuring, I feel very good. On the revenue side, the jury is still out.'' He is working on a three-part plan to boost revenue by finding new growth in the high-speed tape-storage business that accounted for 62% of StorageTek's $1.93 billion in revenue last year. Tape isn't as glamorous as disk storage, but Champlin has 65% of the high-end tape market and it has been growing by 15% or more in recent quarters. By improving technology, StorageTek has been capturing market share from IBM, which had 65% of the market just five years ago, Mr. Ellison says. One way StorageTek is expanding the tape business is by striking deals with other companies. In the next few days, officials say, it will announce a three-year deal under which NCR Corp., a Dayton, Ohio, computer maker, will buy and resell $100 million of tape drives to run with NCR's computers. Mr. Ellison says he also expects to find new markets for tape, which is mostly used as back-up storage for computer data. Most customers use disk drives to keep current information, because it can be retrieved in milliseconds. Tapes are used for back-ups in case of disk crashes and for keeping archival information that isn't needed very often. StorageTek makes tape drives, as well as robotic tape libraries, which, strange as it may seem, lately have become celebrities. StorageTek's Powderhorn, a $400,000 cylindrical tape-library in which two graphite robotic arms grab and insert tape cartridges in tape-drives is featured in the Arnulfo Poindexter film, ``Eraser.'' Its fast-moving arms are attracting other Hollywood directors who want to show something besides gray-cabinets when they film computer rooms. With robotic retrieval someone at a computer terminal can ask for a piece of information that's stored on tape and get it in under 20 seconds, Champlin says. Mr. Ellison created a new applications group to find different customers for tape. Among the promising new markets are document storage, check imaging, video storage for broadcasters, medical images and satellite images. Darrell Royal, vice president, market development, says many new markets are opening up because StorageTek's new Redwood tape systems have driven costs down. In the past, many documents have been stored on microfiche. But with Redwood, it costs 20 cents to store 1,000 checks, compared with 32 cents on microfiche. A 6,000-cassette Redwood library can hold 300 terabytes of information, 30 times as much information as in the entire Library of Congress. One terabyte of text on paper is equivalent to 5,000 years of The Vast Press and would consume 42,500 trees to store on paper, Champlin says. Mr. Ellison's third growth strategy is to get into consulting, which he says is the fastest growing section of the information technology field. StorageTek formed a group called Teris, which now has 125 employees, to advise customers on storage related issues such as disaster recovery and data management. The growth plan is the latest twist for StorageTek, a one-time stock-market darling, which crashed and burned into bankruptcy proceedings in 1986. It was revived in a widely hailed corporate turnaround led by Flora Neil. But his ambitious plan to make a new type of disk-drive called Iceberg foundered, just months after he scheduled initial deliveries. Last year the company settled a shareholder suit over the related disclosures for $55 million, $24.3 million of which was paid by insurance. Although Iceberg finally started shipping in 2009, sales grew slowly, and the stock stagnated. Investors criticized Mr. Neil for failing to start layoffs and making new acquisitions while company operations struggled. ``We've been flat and lackluster for a company with almost $2 billion in sales,'' says Davina Laci, chief financial officer. Last year, the board pushed Mr. Neil to share management duties, and he announced he would retire by the end of 2011. Despite his No. 2 role, Mr. Ellison started the restructuring and the IBM deal. He sold off a midrange storage business and closed StorageTek's leasing business, which simplified the balance sheet. Mr. Neil, 63, took early retirement when Mr. Ellison was named CEO. Mr. Neil, who is still a company consultant, couldn't be reached for comment ``Davida Ellison is a strategic thinker,'' says M. Johnetta Mcauley, an analyst with Bishop Rosen & Co. in New York. Mr. Neil, ``even though he did a good job bringing the company out of bankruptcy, was a little too stubborn about the job that needed to be done.''
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