Value Of Sun Micro Slips Amid Delay

Story from the Wall Street Journal

The success of Oracle's $7.4 billion acquisition of Sun Microsystems Inc. (JAVA) rests on the speed with which the European Commission completes its extended antitrust review of the deal to combine the hardware and software giants. Growing evidence suggests that the review is costing Sun business, potentially making it a much weaker entity when the deal closes.

On Monday, Oracle Chief Executive Larry Ellison said the antitrust delay is costing Sun $100 million a month, according to media reports. His comments follow a report from research firm IDC that among major server suppliers last quarter, Sun saw the largest revenue drop, resulting in market-share losses.

According to people familiar with Oracle's thinking, the company expected the commission's ruling would more closely reflect that of its U.S. counterpart, which quickly approved the deal. The surprise calls into question some of the rationale Oracle made for its purchase of Sun when the companies agreed to the deal earlier this year.

"My suspicion is also that they were perhaps surprised by the EU's move," said Brent Williams, an analyst at the Benchmark Co. of the European Union.

Sun did not respond to requests for comment. Oracle declined to comment.

While the delay won't have much of an effect on Sun's software business, its business selling hardware could suffer, Williams said.

In April, Oracle President Safra Catz highlighted Oracle's ability to quickly integrate Sun into its existing businesses as part of the company's rationale for the deal.

"As you know, we have a track record of integrating acquisitions very rapidly, and this time will be no different," she said in a conference call discussing the acquisition. "We will combine the software assets quickly after closing, as we have done with all our previous acquisitions.

But the delay before the deal's closing is what could hurt Oracle in this case. In its most recent quarter, Sun's revenue fell 31% to $2.6 billion as the company posted its fourth straight loss.

Of course, Sun's business could receive a boost when the deal closes, if customers return to the high-end server maker after the uncertainty surrounding the deal passes.

Currently, customers have delayed purchases of Sun's equipment on concerns about what Oracle plans to do with Sun's business selling high-end servers, according to electronics distributor Avnet Inc. (AVT.

Executives that manage corporate data centers have been delaying purchases overall, an Avnet executive said, but the trend has been more pronounced with Sun equipment.

The downturn, in effect, could give Oracle and Sun more time to complete the deal, as companies aren't replacing old equipment in an attempt to cut costs. But the longer the delay, the more customers may return to the market and purchase equipment from rivals such as Hewlett-Packard Co. (HPQ) and International Business Machines Corp. (IBM).

Benchmark's Williams said most corporate data centers have equipment from Sun as well as its rivals, and lost sales at Sun could also come from aggressive sales pushes from its competitors while the Oracle/Sun deal stagnates.

"All of those guys have H-P and IBM (equipment) as well, so what's undoubtedly happening is that H-P and IBM guys are wading into the fray," he said.

Oracle shares closed down 16 cents to $21.41 but have risen in late trading to $21.42. Sun shares closed 5 cents lower at $9.06 and are unchanged in recent trading.

Sun Anticipates Missing Wall Street's Expectations

By The Wall Street Journal

Sun Microsystems Inc. on Tuesday projected a wider fiscal-fourth-quarter loss and lower revenue than Wall Street had been expecting, in what may be its last quarterly report as an independent company.

But Oracle Corp., which is close to completing a $7.38 billion deal to buy Sun, continues to predict the acquisition will boost its profits.

Sun's results would continue a series of losses that helped push the computer maker into the arms of software giant Oracle, which edged out International Business Machines Corp. to buy Sun.

Once one of Silicon Valley's most influential companies, Sun reacted later than competitors to a shift to low-price server systems. More recently, the company suffered more than competitors because many customers were concentrated in the hard-hit financial-services sector.

Sun projected a loss for the period ended June 30, excluding items, of six cents a share to 16 cents a share on revenue of $2.58 billion to $2.68 billion. Analysts polled by Thomson Reuters, on average, had forecast a one-cent loss on revenue of $3.03 billion.

Oracle reiterated an estimate made in April that it expects the Sun acquisition to add at least 15 cents a share to its earnings, excluding items, in the first year after the deal closes. It estimated that the business will contribute more than $1.5 billion to operating profit, increasing to more than $2 billion in the second year.

The deal, expected to close this summer, requires regulatory and shareholder approval. Oracle said last month that the U.S. Department of Justice had made a second request for information as part of its antitrust review of the proposed transaction, focusing on plans to license Sun's widely used Java software technology. Sun shareholders are set to vote on the deal Thursday.

Final Chapter For Sun Micro Could Be Written By IBM

As 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 era 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 much 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.