Can Sun Stop Its Self-Destruction?

We don’t know what’s going on at Sun (JAVA) but somehow feel that there is a ball still in their court. At first we noted that some of the software assets (Java, MySQL) are very strategic and in some ways the current value of the company ($3.6B TEV at $6.60/share) might be worth these assets. Of course Sun comes along with over $13B in annual revenue, a bloated cost structure, dysfunctional management and declining viability versus competition from companies like HP (HPQ).

The IBM deal seemed like a home run for both parties, were it not for the anti-trust concerns, some of which seem quite valid in areas of the business. The deal is highly accretive to IBM even at $12 or $13/share, so much so that we won’t even bother showing the math here. (Although you can start with the Sun TEV/R of 0.3x versus the IBM TEV/R at 1.5x and start to get the gist of it.)

Unfortunately Sun has been destroying businesses they acquire and shareholder value for a decade. (Before everyone throws their long-term charts at us showing what a rise they had in 1999, save it! They were destroying software companies by acquisition (with one or two clear exceptions) way back then too but it wasn’t recognized by the market and the bubble bailed them out.) Sun is obsessed with selling servers and so they focus on products like mySQL as a vehicle to move more Sun hardware. This linkage is artificial and not what customers want. hey seek standardized (and now virtualized) hardware environments where they can efficiently run their underlying software infrastructure and company applications. They don’t want some specialized solution from Sun or anyone else. This is true for some esoteric applications but not for mainstream computing.

That Sun management still drives the company with this world view and business model is fatal for all concerned. We really are not trying to pick on Sun. And we do sympathize with employees there. Most of them are not to blame and there’s no question that there’s lots of “good stuff” to be had at Sun. But the strategy and the management approach have been rotten for so long it doesn’t make any sense to walk on eggshells about it.

We’ve looked at a set of proprietary server spending data from enterprise customers and Sun is in the Novell (NOVL) category in terms of technology roadmap, spending plans and vulnerability.

But would it be that hard for Sun to stop hurting themselves and get more aggressive about coming up with a strategy that is different and works? IBM was left for dead before Gerstner helped get it sorted out. There are great assets and opportunities still for Sun and a new approach could unlock them. The shares would be worth $12 or even more if they could just get on a decent footing.

Disclosure: Research 2.0 has a small long position in JAVA.

Comments

[Homer II:]

Nahh.. MacNealy so wounded SUNW with selfish, ignorant decisions that it is way too late for their revitalization. Give it up.

Apr 10 02:37 AM

[The Manciple:]

Couldn't agree more with this article. Sun does not know how to run a business and never had -- at least since Ed Zander (former Sun COO) left the company. The fact that Sun is even a player among the big guys is in spite of itself. I would argue that when Sun did well (and does well on a deal by deal basis), it's because of the employees out there hawking its wares and the technology itself -- not because Sun mgmt has a clue. So let the law suits begin and fire the board. Replace the CEO and find someone who has a fighting spirit and a solid business model, solid business sense. And for goodness sakes, Sun, stop thinking that because your CEO waxes on eloquently that this is a sign of leadership or even vision. Bobble heads don't lead a company to greatness, much less survival. So, do I think it's too late for Sun? No. But it will be if Exec Mgmt changes (i.e., fire them) aren't made now.

Apr 10 08:32 AM

[BeenThere:]

A large fraction of Sun's recent losses were goodwill writedowns from paying too much for acquistions. With those off the books, and with continuing cost reductions (i.e. layoffs), Sun's basic cost structure is substantially better than it was 18 months ago. And it made money until the finance industry locked up and stopped buying. It's largest system sales were in the finance industry, so no wonder it took a big hit. All restructuring charges will be done with in the current fiscal year. Next year, baseline costs are much better.

Those who can look beyond the immediate will see a major improvement for Sun's results starting in July-Sept quarter going forward and maybe sooner. The year over year comparisons will be easy to beat. Selling JAVA for $9 was short term thinking. Big challenge is to convince long time customers that Sun products are here for the long term. But with lots of cash in the bank, Sun just needs to keep doing what's its doing to succeed.

Apr 10 11:37 AM

[BeachRider:]

Sun just did a reverse-version of the Yahoo scenario. The board rejected a deal that the CEO wanted. This board & that CEO cannot continue embarrassing the company in that way. It could be possible that Sun can reestablish shareholder value at $10, with a strong business plan, within 12 months. We need to see the plan, though.

That plan needs to focus on software sales to CSCO, IBM, HP and others. JAVA is an anti-Microsoft entity, so don't expect help from them. Niagara's follow-ons are still in the lab. They won't sell so-much-more hardware over the next 12 months to get to $10, only the software can do that.

Apr 12 12:30 AM