Sun Executive Vice President of Corporate Development and Alliances Brian Sutphin shares his views on inorganic growth strategies, including mergers, acquisitions, and strategic partnerships. With the one-year anniversary of two of Sun's biggest acquisitions just passed, Sutphin offers his view from the trenches.
Q: Why do companies pursue mergers and acquisitions?
Sutphin: Primarily for growth. Some companies rely almost exclusively on acquisitions for growth and others not at all. Sun is somewhere in between. For decades, Sun has invested heavily in R&D and technology innovation — creating a broad and deep product portfolio that includes technologies such as Java, Solaris, and SPARC. Internal development is important, but it's not enough.
Acquisitions are one means of bringing to a company the innovation that, in the words of a Sun co-founder, "happens elsewhere." But it's important to emphasize that acquisitions complement Sun's organic efforts, they are not a substitute for them. They are also a great way of adding new talent to the company.
Q: How do you determine if a merger or acquisition is in line with your company strategy?
Sutphin: At Sun we follow a corporate operating system — an ongoing, regular, planning cycle that produces the strategic plan by which we run the company. For the most part, our inorganic growth activities, including acquisitions, are directed by the output of that planning process.
Q: What criteria do you use for the companies you look at?
Sutphin: That depends on the underlying rationale for the acquisition. For example, if we're looking to round out our product line, we'll focus on the quality of the development team and the fit and completeness of their products. If our goal is the expansion of our business into new markets, we'll emphasize the company's sales, services and overall go-to-market capabilities. One criterion that applies to every acquisition, however, is the quality of the people.
Q: 2005 was a big year for Sun in terms of acquisitions. What was the impetus behind the activity? What have these companies brought to Sun?
Sutphin: We did two big acquisitions in 2005 — StorageTek (STK) and SeeBeyond. Both acquisitions were important for us, and filled significant gaps in our storage and software businesses.
STK was transformative for our storage business. It gave us the industry-leading product line in tape automation — the product of 35 years of R&D investment. STK was an intensely customer-focused company, which is readily apparent in the long-standing blue chip customer base they brought to Sun. Equally important was STK's strength in storage sales and services, both in number and expertise. In fact, given their scale, we did a reverse integration of sorts by integrating the Sun storage sales and services people into the STK team, creating in the process a global storage sales practice now headed by a former STK executive.
Another benefit of the acquisition was the ability it gives us to integrate technologies and practices across our entire product line. For example, we can now combine STK's strong capabilities in data archiving with our identity management products to better address the regulatory compliance market opportunity.
The other big acquisition we did last year was SeeBeyond, which gives us a much-needed capability to integrate disparate business processes and information into one common framework — our Java Enterprise System. SeeBeyond had developed its products using open, J2EE standards, which made for a very smooth technical integration with the existing Sun product line. They gave us a talented, experienced development team, and, as with StorageTek, they brought strong software sales expertise. We've combined the SeeBeyond and existing Sun software sales teams into one global practice headed by a former SeeBeyond executive.
Q: How does Sun manage the integration process?
Sutphin: Successful integrations require strong leadership from the sponsoring business group. For each acquisition, we designate a lead integration executive from within the business. That executive is supported by a small, dedicated corporate team that develops and communicates integration best practices and executes the day-to-day integration activities. In addition, we staff our integration teams with representatives from all relevant functional organizations, such as HR, finance, sales, legal, WWOPs (worldwide operations), and marketing.
We assign integration roles early in the process in order to have integration leadership closely tied into both strategic and tactical objectives. We review integration status monthly, sometimes as frequently as weekly, at Jonathan's staff meeting. These discussions are extremely valuable in providing executive management visibility into the overall integration status, and have been the ideal forum for timely decision-making on important integration issues.
Q: How quickly should an acquisition pay off to be considered successful?
Sutphin: It depends on the purpose and nature of the acquisition. For example, over four years ago we acquired Afara Websystems, a company that was developing a multicore SPARC microprocessor and which became the foundation of our Niagara product line. Given the length of microprocessor product development cycles, it took over three years to bring the first products based on the Afara chip designs to market. The acquisition has been very successful, but the timeframe for realizing returns has been several years.
On the other hand, an acquisition of a more complete, existing business such as StorageTek carries an expectation of a much shorter-term financial return.
Q: How do you handle the negative impact that often comes with M&A activities, such as layoffs and declining morale, and still retain key employees?
Sutphin: We attempt to communicate our strategy for the acquisition up front and create a common vision with the acquired company of how the combined companies can be more successful in addressing defined market opportunities. If that common vision exists and there's a shared sense that both companies can be more successful working together than separately, that enthusiasm helps carry the effort through the stress of whatever post-closing organizational realignment or reductions might occur. However, if it doesn't appear that the people in the company we're looking at fundamentally believe in the combined company value proposition, the acquisition would have little chance of success, in which case we end discussions.
Q: What about the need to let people go and managing the apprehension leading up to that?
A: Prior to announcing an acquisition, we meet with the management team of the acquired company, review positions that will be available, and jointly decide on the best candidates for those positions — from both companies. Then, immediately after the announcement, we sit down with as many employees as possible to discuss their roles post-close and, in many cases, extend employment offers subject to the acquisition closing. Engaging openly and directly with employees early on brings them into the process and lets them know they have a fair shot at available positions. Above all, early and regular communication is the single most effective tool for managing uncertainty and apprehension.
Q: What has been the impact of these acquisitions on Sun's bottom line and culture?
Sutphin: Very positive. When you look at the financial impact of a handful of past acquisitions, it's quite staggering. The Cray acquisition became our high-end and midrange SPARC server line. Our x64 server line is based on the Kealia acquisition that brought Andy Bechtolsheim back to Sun. Our new CMT (chip multithreading) server line is based on microprocessor designs acquired from Afara Websystems. The addition of StorageTek has had a huge impact on our storage product line. Procom gave us a highly competitive entry into the NAS (network attached storage) market. Waveset brought us industry leadership in identity management, SeeBeyond valuable business integration capability. Not all acquisitions are successful, of course, but it's difficult to imagine what Sun would look like today had we not done even the half-dozen acquisitions just mentioned.
There are also huge indirect impacts from our acquisitions — the talent they bring into the company. Probably few people remember a software acquisition we did years ago, Lighthouse Design, but that's what brought Jonathan Schwartz to Sun. There are many examples throughout the company of leaders, present and future, that came to Sun via acquisitions.
Q: What about cultural impacts?
Sutphin: Acquisitions, through their employees, have a significant impact on corporate culture. As I mentioned, we set the quality bar high for the people in companies we acquire. These employees tend to share Sun values of innovation, collaboration, integrity, and customer focus, which reinforces our cultural norms. Often, however, they bring something new or different — a unique perspective on the market or an industry best practice — that helps refresh the values and practices that influence company culture.
Take STK as an example. Decision-making at Sun welcomes, even encourages, vigorous debate. STK was almost the opposite. Decisions tended to be made with little debate, passed down, and executed against. When we first put the Sun and STK teams together, there was a bit of a clash, with the Sun employees wondering why the former STK employees seemed to not want to voice an opinion and the STK employees wondering when we would actually get to the task at hand! However, over time we're converging towards the middle, and it seems to be working better for everyone. STK employees can weigh in on important decisions, and Sun employees see decisions being made faster.
Q: The StorageTek acquisition anniversary just passed. Do you have success milestones and have you met them?
Sutphin: The primary milestones are financial, specifically revenue and cost synergies. We've met those milestones, and the financial impact is incorporated into Sun's overall financials.
Q: What M&A trends do you see in the industry?
Sutphin: Consolidation. About a year ago, I saw a report that listed standalone software companies with revenues over a billion dollars. Recently, I saw an update of the same list, and about half of the companies were gone — all acquired.
Q: How have customers responded to Sun's acquisitions?
Sutphin: Very favorably. But this shouldn't be surprising, since one of the main reasons we acquire companies is to better serve customers.
Also, particularly in the case of smaller, private company acquisitions, their existing customers tend to feel more stability in working with a bigger, more established company. Even in the case of larger acquisitions like STK, where we have common customers, customers tend to prefer consolidating their IT requirements with a smaller number of providers — the "one throat to choke" principle.
Q: What's next for Sun in the coming year?
Sutphin: We'll continue to look at inorganic growth opportunities, both within and outside of our existing product and services footprint, in order to grow shareholder value.
About Brian Sutphin
Brian Sutphin is Sun's executive vice president, Corporate Development and Alliances. In this position, Sutphin heads Sun's overall inorganic growth efforts, focusing on mergers and acquisitions, strategic alliances and technology licensing. Under his leadership, the corporate development organization has completed a number of key acquisitions that have brought world-class people and industry-leading products and technologies to Sun including StorageTek, See Beyond, SevenSpace, Waveset Technologies, Kealia, Pirus Networks and Afara Websystems.
Prior to joining Sun in 1994, Sutphin was an attorney in private practice with expertise in business transactions, M&A and corporate law. He received an undergraduate degree in economics from the University of Wisconsin-Madison and a law degree from Stanford University.
Sun Executive Vice President of Corporate Development and Alliances Brian Sutphin shares his views on inorganic growth strategies, including mergers, acquisitions, and strategic partnerships. With the one-year anniversary of two of Sun's biggest acquisitions just passed, Sutphin offers his view from the trenches.