Sun Microsystems: Catastrophe or disaster?

The Sun also rises? Nah, too Hemingwayesque. The Sun will come out tomorrow? Dang, now that song from Annie will be in my head for days. Here comes the Sun? This isn’t about solar power. Shoot, I need a good lede!

Let’s cut to the chase: Sun Microsystems is in a heap of trouble.

Well, let’s clarify that statement. The company was profitable, and sales were growing. That’s the good news. The bad news is that the financial results are going south, Sun’s stock price is cratering, and it gets a significant portion of its revenues from the financial services industry – you know, Wall Street. Those cats aren’t doing so well, you may have heard. The worse news is that Southeastern Asset Management, Sun’s biggest shareholder, just increased its equity stake to about 21%, and they are not happy about what’s happened to the stock price.

In a filing last week with the SEC, Southeastern noted, “Southeastern has talked to (Sun’s) management, and will have additional conversations with management and/or third parties, regarding opportunities to maximize the value of the company for all shareholders.” That may not sound like much; coming from Southeastern, them’s fightin’ words. O. Mason Hawkins, the respected fund manager of Southeastern, is no Carl Icahn or Kirk Kerkorian, but he will do a lot more than converse to protect the value of his sizable investment in Sun Microsystems.

Sun Microsystems may be getting too big for its britches. It’s made two huge acquisitions in recent years, StorageTek and MySQL. You could argue that these were strategic purchases that extended the company’s capabilities and product portfolio. Whatever the merit of those acquisitions, they burned up a lot of cash ($4B for StorageTek and $800M for MySQL). Sun Micro’s cash fell from $3.6B to nearly $2.3B in the past year. The company has laid off lots of people and cut other costs, but you don’t want to be running low on cash in this economic environment.

Much was made last week about Sun co-founder Andy Bechtolsheim reducing his role at the company to become chairman of Arista Networks, an Ethernet switch startup. I don’t think that’s really a big deal; he’s bailed out of Sun before to do the startup thing. More important is whether Sun CEO Jonathan Schwartz is up to the job. He’s a tech whiz, of course, and he’s got a commendably candid blog out there. The talk now is whether Schwartz can continue to grow sales, drive product development, make money, AND keep shareholders happy in these difficult times. Especially big, powerful shareholders.

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