Sun Buys All of Tarantella, Procom's NAS

by Timothy Prickett Morgan

Sun Microsystems went on a tiny shopping spree this week, and spent a little bit of that $7.5 billion cash hoard it brags about so much on two acquisitions: remote access middleware software maker Tarantella and the intellectual property rights to the network-attached storage (NAS) software developed by Procom Technology. Sun already had partnerships with both companies, and appears to have made the acquisitions for offensive and defensive reasons.

Tarantella, you will remember, is based in Santa Cruz, California, and was once part of a company that bore the name of that city: Santa Cruz Operation. SCO, which was founded in 1979, was one of the early suppliers of commercial Unix operating systems (Xenix, then OpenServer, UnixWare, and eventually System V) for X86-based servers. In August 2000, commercial Linux distributor Caldera Systems bought the Unix business from SCO and said it was going to take the Unix intellectual property it got from SCO (which had bought the rights to AT&T's Unix System V from Novell) to improve Linux and peddle it along side Unix. SCO kept hold of the thin client and host access server business and renamed itself Tarantella, and Caldera Systems (which was founded with some money from Novell's founder, Ray Noorda) changed its name to The SCO Group. That SCO is the one that sued IBM in March 2003 for allegedly putting Unix intellectual property into the open source Linux operating system. That SCO is also the one that has given Sun the green light to take Solaris open source as OpenSolaris. (Although whether or not Sun needed to do this is a subject of debate, since Sun probably has the deepest Unix licensing in the industry.)

Sun said that it was paying around $25 million to acquire Tarantella, which could certainly use the help financially, being a very small player that tried to compete against Citrix Systems and Microsoft. In fiscal 2000 (ended September 30), Tarantella had sales of $148.9 million, losses of $56.9 million, and $26.4 million in the bank. In 2001, when it closed the sale of the Unix business to Caldera, it had sales of $66.7 million, losses of $5.7 million, and $14.1 million in the bank. In 2002, Tarantella shuttered some businesses and had only $14.2 million in sales, and was still wet with red ink, to the tune of a loss of $16.2 million. The company had a loss of $9.7 million on sales of $14 million in fiscal 2003, and ended 2004 with sales of $12.5 million and a loss of $15.7 million. However, Tarantella did have $9.6 million in cash and equivalents as it exited fiscal 2004, which was triple what it had in 2003, when the company's shares were bumped from the Nasdaq stock market to the Over The Counter (OTC) exchange.

To say that Tarantella, which has 12,000 customers, has had a rough time is an understatement. But the company has persevered and streamlined its products down to one: Secure Global Desktop Enterprise Edition, which was just ported to Solaris 10 running on X86 processors and which is the thing that Sun executives say they need to bolster Solaris itself, its current thin client computing offering, and its future grid-based client computing offering.

Secure Global Desktop Enterprise Edition is a remote access program that allows end users working from PCs, laptops, PDAs, handhelds, and just about any other device that supports a Java Virtual Machine to access server-based applications running on Unix, Linux, Windows, and proprietary platforms all from a single set of security software. The software had already been supported on Sparc/Solaris platforms, and Sun was actively selling it as well as competing products from Citrix, which has a long-standing licensing agreement with Microsoft and which had sales of $741 million in 2004, net income of $131.5 million, and a market capitalization of $3.7 billion. (Sun surely would not buy Citrix because it is too expensive, but it is surprising that Microsoft has not.) While Secure Global Desktop Enterprise Edition allows access to just about any kind of server and any kind of application, it is only compiled to run on Linux and Solaris, which just so happen to be the platforms that Sun peddles the hardest.

Tarantella clearly needed some more substantial resources to compete against Citrix and Microsoft, but John Loiacono, general manager of Sun's software unit, said that the deal was more about Sun getting its hands on Tarantella technology that it sees as a means to not only make Sun Ray thin clients more attractive, but that it will use to build out the "display grid" that Sun chairman and CEO, Scott McNealy, hinted was coming down the pike as an alternative to using desktop PCs. Specifically, McNealy said Sun is working on a display grid, which will sell customers Sun Ray thin clients for something like $1 per display per day and let them access office applications remotely. (Sun offers such remote capabilities for its own employees and last November announced a version of its Sun Ray thin client that plugs directly into broadband Internet connections.) The piece that has been missing, explained Loiacono in a conference call with Wall Street analysts this week, has been the host access tool. Customers could buy tools from Tarantella, Citrix, or Microsoft, but they ended up paying a few hundred bucks per seat just to be able to access their host applications. That cost, he said, did not include the cost of the device or the server infrastructure behind it. If Sun is aiming at $1 per display per day, it has to get the total cost below $300 a day if it wants to make $65 in profits.

"The goal for us is to integrate this into Solaris and make it part of a complete interoperability platform and to have it as the foundation for building out desktop environments as a utility," said Loiacono. "We want to think about the desktop as a device for access, just like a cell phone today." He said that the lack of an integrated host application access device has slowed down sales of Sun Ray thin clients, and that by integrating it with Solaris, Sun would be able to remove one of the barriers. Thin client sales, of course, drive server sales, which is why Sun has been pushing thin clients for many years. But they offer a stateless means of providing computing that is, in reality, more secure than a desktop PC, and that means a lot more in 2005 than it did in 1998. The thing about Secure Global Desktop that makes it appealing is that it can run on the same machine where the Sun Ray server runs, and that customers do not need to install access agents on their host computers or on their thin clients. If you want to build a display grid with a low cost of operation, you need such intellectual property. If Sun didn't buy it, it would have to write it, and it probably could not have created the software for less than $16 million, which is about its net cash outlay after adding Tarantella's cash to Sun's own pile.

Tarantella has 81 employees, and Loiacono would not specify what Sun's plans were for those employees. Presumably all of the engineers move over, and Sun will redeploy Tarantella's sales people in pushing thin clients and the future display grid. Sun will continue to partner with Citrix and Microsoft and has no plans to change Tarantella's existing partnerships, including a big one with IBM. (If anyone else was interested in acquiring Tarantella, it was probably Big Blue.) Sun expects the deal to close in the third quarter.

In a separate deal, Sun also announced that it has acquired the rights to the NAS software created by Procom Technology, a maker of NAS gear located in Irvine, California, for $50 million in cash. Sun has been licensing Procom's software since April 2004 for use in its StorEdge 5000 series of NAS devices. Sun has had a tough time in the storage market. It bought Encore Computer for high-end arrays and SANs as the dot-com bubble was expanding, then MaxStrat, and then threw in the towel and inked a reseller agreement with Hitachi. It brought in low-end storage from Dot Hill, and acquired Pirus Networks in September 2002 for its storage provisioning software. Exactly what Procom will do with itself now that it has sold its core product to Sun is unclear. The company also sells networked CD and DVD drives, CD duplicators, and wireless hard disks for external storage.