Thursday, March 19, 2009

Final Chapter For Sun Micro Could Be Written By IBM

sun microsystemsAs Originally Posted at The Wall Street Journal

Sun Microsystems Inc. has been at the leading edge of some of the biggest trends in computing since the 1980s. But the Silicon Valley company has often lagged behind at making money from them.

Now the time to do so may be running out for Jonathan Schwartz, the brainy software specialist who became Sun's chief executive in 2006.

The disclosure of talks for Sun to sell itself to International Business Machines Corp. caused Sun's stock to jump nearly 79% Wednesday to $8.89 on the Nasdaq Stock Market.

If the deal does go through, IBM is likely to pay $10 to $11 a share for Sun, according to people familiar with the matter. That would put the purchase price around $8 billion -- or about $6.5 billion including the $1.4 billion in cash on Sun's balance sheet.

While negotiations are under way, a transaction might not occur and the talks could fall apart, these people said.

Mr. Schwartz declined to comment through a Sun spokeswoman, who characterized the reported talks with IBM as "rumor and speculation" that the company would not discuss.

But there is no debate that a sale to IBM would mark an inglorious end to an industry leader that once boasted it put "the dot in dot-com" and reached a market value of $205 billion during the Internet bubble.

Under Scott McNealy, Mr. Schwartz's predecessor, Sun exemplified an sun microsystemsera in which big companies could be built by giving engineers the freedom to chase new ideas. That management philosophy now seems an endangered species, as competition, slowing sales and other forces create consolidation pressures and a focus on profitability.

Sun, a major maker of computer server systems, has suffered disproportionately from the recession because of a reliance on high-end systems sold to the hard-hit financial industry. But some customers, former Sun executives and analysts said management mistakes contributed heavily to Sun's problems.

Among the biggest was a belated move to adopt low-cost servers that use so-called x86 chips from Intel Corp. and Advanced Micro Devices Inc., instead of chips called Sparc that Sun designed.

Some once-loyal Sun customers, such as the online software company Salesforce.com, said they saved big money by adopting alternatives; the San Francisco company chose to move to x86 servers supplied by Dell Inc.

"Sun's culture is not really about the customer -- it's more about them and their technology and their engineers," said Marc Benioff, Salesforce.com's chief executive, in a recent interview.

Sun, founded in 1982, first shook up the market for computer workstations -- single-user machines favored by engineers, product designers and others that need intensive computing capability.

The company came out with low-priced, powerful workstations that were designed by co-founder Andreas Bechtolsheim. They ran a type of industry-standard software called Unix that was adapted by Bill Joy, another Silicon Valley technologist.

Mr. McNealy, who remains Sun's chairman, provided the management skills, helping the company to outmaneuver larger competitors and later execute a shift into the market for server systems.

Some of Sun's inventions continue to have an impact. The idea of publishing software specifications, which helps prevent customers from being locked into a supplier, is now embodied in "open-source" software such as Linux.

At times, Mr. McNealy and other Sun executives showed a tendency to deride other companies' technology. Sun became a major Microsoft Corp. critic and legal opponent, until Microsoft in 2004 agreed to pay Sun nearly $2 billion to settle an antitrust case and other disputes.

Mr. Schwartz was promoted from chief operating officer to CEO as Sun was struggling to regain its early Internet-era growth. Many observers saw him as a positive force, a view bolstered when he acknowledged past mistakes. He has pushed to offer open-source versions of Solaris, its popular Java programming technology and other products.

But some other moves promoted by Mr. Schwartz have been panned, including Sun's $4.1 billion purchase of tape-drive maker Storage Technology Corp. in 2005, a business seen as slow-growing.

The $1 billion Sun paid in 2008 for MySQL AB, maker of a popular open-source database program, was also characterized by some analysts as excessive.

Ulf Michael Widenius, a MySQL co-founder who recently decided to leave Sun, praises Mr. Schwartz's vision but said he hasn't been able to fix Sun's bureacratic middle-management structure. "He knows what the right way is, but it is simply not done," Mr. Widenius said.

Mr. Schwartz tried to juice up Sun's image with investors,and launched a one-to-four reverse stock split. But neither did mucsun microsystemsh for Sun's shares, which fell 70% in 2008 before the stock-market meltdown accelerated last fall.

Meanwhile, the company gained some more powerful shareholders, including Kohlberg Kravis Roberts & Co., Relational Investors LLC and Southeastern Asset Management Co.

The latter is now Sun's largest stockholder, with more than 20% of its shares, and negotiated the right to designate two Sun board members. A spokeswoman for Southeastern declined to comment Wednesday.

In response to slowing sales, Mr. Schwartz ordered the latest in a series of restructurings last fall, designed to reduce Sun's headcount by 15% to 18%.

Meanwhile, certain Sun investors began pressing board members about six months ago to find a suitor because the company had "a huge cost structure that they don't understand," said one person familiar with the situation. Talks with tentative buyers "intensified this year," this person said.

Besides flirting with Hewlett-Packard Co., Sun officials also approached Dell. IBM was an attractive buyer because "IBM has better controls [and] better management," this person said.