Is Sun Ready to Give Up?

| About: Sun Microsystems (JAVA)

One of the granddaddies of Silicon Valley, Sun Microsystems (JAVA) may finally have to give up the good fight - presenting investors with the prospects of a quick profit grab.

Although not quite in the pantheon of Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL) and Seagate (NASDAQ:STX), Sun has been braving its own path in technology since its founding in 1982. The paradox is that a company which professed a radical departure in business computing has itself been too slow to adapt to rapid change, and now finds itself as takeover prey.

With assets far exceeding its current valuation, investors stand to make modest gains if the company decides to break itself up, or if it finally succumbs to the takeover rumors circulating for years.

The alarm sounded louder than ever when the company reported Q1 2008 earnings. A $1.68 billion loss was attributed to a slowdown in technology, but for us Sun followers it's more of a classic case of arrogance and ineptitude.

For those of you unfamiliar with Sun, the company started out making proprietary computer server systems - meaning that you had to buy the whole kit-and-kaboodle versus giving customers the opportunity to mix-and-match products in a so-called open platform.

Sun was a super-star of the dot-com era. It supplied the underpinnings for the thousands of new companies pioneering the Internet. Its reputation for reliable systems and technical innovation trumped the premium prices it had charged.

But Sun ignored two irreversible trends that would bring the company to its knees: cheaper hardware and open-source software.

Facing immense pressure from companies that ultimately adopted open platforms such as IBM and Hewlett-Packard (NYSE:HPQ), Sun jumped into the fray. But in the end, it couldn't compete against these true heavyweights.

The company's corporate culture certainly didn't help. Former CEO Scott McNealy (who remains as chairman) had been a media darling during the tech bubble for his anti-Bill Gates quips. But now we know who got the last laugh.

In the meantime, current CEO, Jonathan Schwartz, hasn't been able to turn around Sun during his nearly three years in the corner office. It may be that his experience is insufficient to tackle such a thorny problem, with his background rooted in start-ups and Sun's management ranks. (Hint: maybe it's not such a good idea to bring in a CEO with a ponytail unless he has a tough track record to back up his affectation.)

For the quarter ended Sept. 28, Sun's net loss of $1.68 billion amounted to a loss of $2.24 cents a share, compared with net income of $89 million, or 10 cents a share, during the same period the year before. Revenue declined 7.1% to $2.99 billion from $3.22 billion a year earlier.

In addition to products and marketing, a couple of Sun's core markets are telecommunications and financial - both of which are suffering mightily these days.

Last November, Sun tried to polish its image through a one-for-four reverse stock split. As it stands, Sun shares have dropped to pre-split prices.

Sun's shares currently trade at $5 and change, giving it a market value of about $4 billion. At the same time, the company's annual sales came in at approximately $14 billion. Combined with the company's intellectual property portfolio valued at about $2 billion, its lackluster acquisition of StorageTek and a roster of blue-chip customers, Sun is ripe for the pickin'.