Sun is toast after deal with Evil Empire

IT WAS the best of times, it was the worst of times. That's the one-sentence summary of Sun Microsystem's 2 April announcement that it reached an accommodation with a firm Sun CEO Scott McNealy once called the "Evil Empire": Microsoft Corporation. The good news is that the struggling Mountain View, California-based "dot in dot com" company will receive nearly $2 billion in payments from Microsoft as a result of several agreements.

The bad news is that Sun is scheduled to take a financial bath of epic proportions when it issues its financial report for its 3FQ04, which ended on March 28, 2004. The firm ‘fessed up to the fact that it would lose at least $750 million 3FQ04, adding to the $4.4 billion Sun has managed to lose over the last three calendar years.

Along with the addition comes subtraction: Sun will lay off another 3.3K people, or about 10 per cent of its workforce. Here's SKHPC's summary of the latest episode of the Sun Saga, replete with the positive and negative aspects of this intriguing and unfinished story.

The Good, The Bad, and the Ugly
Not surprisingly, Sun led with the Good News: a very lucrative accommodation with its former whipping boy and Main Enemy, Microsoft. The truce, which endows Sun with big bags of Microsoft Money—and some potential problems down the road—has been a long time coming. Executives from Sun and Microsoft claimed they had been negotiating a cessation of hostilities and a resolution of financial disputes the deal for about a year, said talks resulting from a call McNealy made to Steve Ballmer some 12 months ago.

$2 billion worth of Sun-Shine
There's a lot of quid—and an equal amount of pro quo—in this deal, which arguably should have been announced a day earlier than 2 April. Under the 10-year pact with Microsoft, the Redmond, Washington-based software behemoth will pay Sun $700M USD to resolve antitrust issues and $900M USD to resolve patent issues. In addition, the companies will pay royalties to use each other's technology.

Microsoft is initially paying Sun $350M USD in royalties, Sun will make royalty payments to Microsoft when it begins to incorporate Microsoft technology at some point in the future. In addition, the lawyers of war have been leashed. Sun will withdraw its antitrust lawsuit against Microsoft in the United States, and both firms will eschew past patent infringement claims and seek a patent cross-license agreement.

Tech Talk
The goal of the technical collaboration between Sun and Microsoft is to improve interoperability between the erstwhile arch-rivals' respective products, according to Sun. Among the technical details of the agreement, which is designed to improve information sharing between the companies' respective server and desktop products, are:

o The firms will share technical information to allow their respective security products, specifically their directories and identity servers, to work together. The agreement could also be expanded to e-mail and database software

o Sun will license access to the Windows desktop communications protocols under a program initiated as a result of Microsoft's settlement with the U.S. Department of Justice in 2002.

o Microsoft will be allowed to continue to provide technical support for customers that use its Java Virtual Machine, the software needed to run Java programs. The former rivals also promised to work to improve technical collaboration between Sun's Java software and Microsoft's .Net technology.

o Finally, Sun will obtain certification from Microsoft to run Windows on its servers based on Intel's Xeon and AMD's Opteron processors.

No Lack of Bad News Here!
And now for the bad news, or at least some of it—In a pre-announcement of Sun's 3FQ04, which ended a week ago, the firm stated that it expects revenues of $2.65B USD and a net loss of between $710M USD and $810M USD, or 23 cents to 25 cents per share. In a validation of the contention that Sun's R&D spending was unsustainable, Sun's CFO said the company expects to reduce its research and development and administrative expenses by $500M from about $5.2B in FY04, which ends June 30, to about $4.7B in FY05. Whether the loss will aid in much-hoped-for return to a black-ink budget or whether it's yet another one-way ticket to insolvency is uncertain.

An Ironclad Layoff Guarantee for the Rank and File
What is certain is an imminent decimation of the Sun workforce. As part of its restructuring initiative, Sun will lay off about 3.3K people. The Mountain View, California-based company's latest adventure in “rightsizing” will account for about $200M USD of the firm's massive 3FQ04 net loss. The company now employs more than 35K workers worldwide, so the layoffs account for about 9 percent of its workforce.

The job cuts will affect all divisions and geographic areas. The majority of cuts will take place by the end of 2004, Sun said. At least there's nothing new here: Sun already has cut 8.5K employees in two major layoffs in 2001 and 2002. Perhaps the fine art of firing people will reflect a new core competency at Sun, where it seems that no good deed—at the rank and file level—goes unpunished.

A Titanic Turnaround Artist?
Sun also announced the promotion of Jonathan Schwartz to President and COO, effective immediately. Schwartz is definitely on the fast track. Recently anointed Executive VP of Software at Sun, Schwartz has been moved up again, this time to Ed Zander's old spot as President, and COO, reporting to McNealy. (Ironically, McNealy said the President and COO position was irrelevant and unnecessary when Zander and half a dozen senior Sun executives bolted in 2002).

All functions, except HR, corporate resources, finance, and the office of the CTO, will now report to Schwartz. Mr. Schwartz will report to Scott McNealy who will retain his titles of Chairman and CEO. Schwartz's role won't be ceremonial, McNealy said on a conference call. "He will be driving the product, sales, marketing and manufacturing efforts at Sun with a huge, hands -on chief operating officer role at Sun. This is a good thing," McNealy crowed. Perhaps a bit prematurely, as McNealy's role is vastly diminished.

This is a Good Thing?
But good for who? First off, Schwartz's elevation divests McNealy of significant power, and may represent the first step in the formation of a new guard that plans to take over Sun and attempt to resurrect the firm from its Fine Mess, starting with the “rightsizing” of McNealy. Certainly there are doors of sufficient size to accommodate Sun's ouster of McNealy and all his executive trappings. An ouster, which in SKHPC's opinion, should have taken place long ago.

As for the newly empowered Schwartz, he appears to have some excess baggage of his own. He is a former McKinsey consultant who, while attempting to serve as Sun's chief strategy officer, oversaw a string of disastrous acquisitions that cost Sun millions; then he borrowed $4M USD from Sun to meet margin obligations, according to SEC filings. This is the person tasked with raising the Titanic in Mountain View? Oh well... we do live in interesting times! µ

(c) 2004 by Terry C. Shannon, Consultant and Publisher, Shannon Knows HPC