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Is Sun becoming a dying star?

When you wish upon a star...
Sun Oct 05 2003, 17:49
THE VULNERABILITY of Sun Microsystems has rarely been outlined as much as the world saw last week.

It almost had a pink outline round it.

Sun's (ticker: SUNW) current stock price of $3.31 gives it a total stock equity of about $10.8 billion but with cash of $5.7 billion for any buyer, the effective price is probably only about $5 billion. Or maybe a buyer should take a leaf from the dotcom book of rules, and buy the company with less than 10% cash and pay the rest in shares.

Cose-island---picture-copyright-mike-magee---the-cose-arrangement-that-some-will-remember--target--_blankThat $5 billion price ticket on Sun is a long way short of the $24 billion that printer company Hewlett Packard paid for ailing company Compaq just 18 months ago. In the same way, the current stock price and total equity of Sun are a long way from late in year 2000 when shares traded at over $60 and total stock equity was in the order of $200 billion.

Some have been calling for Sun to cut staff but Sun refutes this by saying that they have cut thousands of employees in the last two years. That may be true but the 36,100 employees that it has today is only 600 less than Sun had at the end of year 2000.

In that year Sun had revenues of $15.7 billion and generated $2.3 billion income but for the year ending 30 June 2003 the total revenue was just $11.4 billion and a loss of $500 million was evident even before Sun included the paper loss of goodwill to the tune of a further chunk of billions. Its recent re-evaluation of deferred tax and future income prospects caused another paper loss of $1.05 billion to be added to that figure.

It seems that the board and CEO must bear some responsibility for these problems. It should not have been difficult for supposedly skilled business people to see that the Internet boom was built on the twin platforms of an unsustainable premise that a) profits are not important and b) profits will come later - a whimsical Tulipomania jump of faith.

Sun's marketing appears to have been aimed at this house of cards and those potential customers based on the "old economy" were largely ignored. To its everlasting credit, Sun did squirrel its profits away rather than expand aggressively but that money would have been better used in the development of other product lines which would let Sun's eggs be laid in several baskets.

Late in "Internet Boom Time", Sun released Star Office which was and is credible alternative to Microsoft's office environment but made the mistake of giving it away. Its subsequent reversion to a paid model lost it many friends and it discovered that it is much easier to switch from a paid model to a model which is free than the reverse.

Sun has tried to be a late starter for sales of machines for Linux users but doesn't understand its semaphore properly and has sent mixed signals.

Initially Sun was in favour of Linux across all its hardware range but when customer enthusiasm revealed the damage that Linux could do to its Solaris version of Unix, Sun backtracked and said that Linux was not suitable for Enterprise systems but only for low-end machines. Without a strong customer base for Solaris and the consistent revenue stream of maintenance contracts, Sun would probably have problems justifying its continued sales of Solaris in the face of Linux.

Sun appears to now have few choices open now. One option is to be taken over but it is not easy to see who might want it right now. Some have mooted Sony as a suitor but I can't see Sony being anxious to acquire such a set of problems. Fujitsu-Siemens has a track record of taking the Sparc and Ultrasparc processor design and tweaking it to get better performance, then under licence from Sun, selling Solaris with that new hardware. Despite its successes I can't see Fujitsu-Siemens wanting to expand out of its current market space in these worryingly uncertain times.

It has been suggested that Sun should give up its software business and drop the "Mad Hatter" software project and concentrate on hardware, ultimately becoming a box maker, much like Dell but at a higher point in the computing world. Sun does face the reality that Solaris is under great threat from Linux and that Linux is unlikely to disappear even if current legal disputes are not decided the Open Source way.

Sun also finds itself in the same situation that Compaq was with DEC's Alpha processor. The cost of developing its own processor, the Ultrasparc, is a very significant financial burden on the company and significant levels of sales are necessary if those development costs are to be recovered. The Ultrasparc 3 was almost two years behind schedule and that can mean an extra cost of several billion dollars, money that Sun is not likely to recoup soon. It can't very well move to Intel processors and the Power PC is definitely IBM's, so its only option is to move to AMD processors and let others share the costs of research and development.

Sun will find itself with tough choices in the near future. Just how tough those choices will be shown later this month when it releases its quarterly financial statement for the period ending September 30. Given its recent announcements of revisions, few believe that the picture will be rosy. µ


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