Sun Faces Pressure to Sell - But Who's Buying?
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Sun Microsystems could be forced to sell itself or some of its assets as the economic crisis worsens problems facing the high-end computer maker, which has been struggling since the Internet bubble burst in the early 2000s.
But tight credit markets and the challenge of valuing Sun's (NASDAQ: JAVA) intertwined software, hardware and services businesses could put off potential buyers such as rival server makers Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM) and Dell (NASDAQ: DELL), bankers and analysts say.
Last month, investment firm Southeastern Asset Management disclosed that it had become Sun's top investor with a fifth of its shares, and said it might go around the technology company's board to talk to "third parties" about alternatives.
Other investors like private equity firm Kohlberg Kravis Roberts & Co. (KKR) may also support a sale to recover their money. KKR holds a seat on Sun's board and had to write down the value of its $700 million debt investment in the company.
"I have not seen a convincing strategy laid out by management," said Shebly Seyrafi, an analyst with Calyon Securities, adding that Sun may be pressured to split up the company if management failed to turn around the business.
Sun shares have nose-dived 77 percent this year, more than double the decline in the NASDAQ Composite Index, to around $4, a 13-year low. The stock is down 98 percent since 2000, the peak of the dot-com boom.
Investor frustration over the stock price has been compounded by Sun's high operating expenses and failure to boost profitability. In October, Sun posted a $1.7 billion quarterly loss and CEO Jonathan Schwartz said cost-cutting measures were in the works.
In addition to HP, IBM and Dell, three technology bankers listed Cisco Systems (NASDAQ: CSCO) and Japan's Fujitsu, which already has a business partnership with Sun, as natural bidders. They spoke on condition of anonymity as they would vie for the business if Sun puts itself in play.
But these companies may not want to take on the challenge of integrating Sun, which has a market value of about $3 billion, given the turbulent economy.
Sun may have more luck splitting its hardware and software divisions and selling them separately, although valuing the parts may be a challenge because they are tightly linked.
"I don't think there's a buyer for the company as a whole today," said one of the bankers, who has discussed with some of the companies their interest in buying Sun.
Sun rose to prominence during the 1990s when tiny start-ups flocked to buy its high-end computers, which run on its Solaris operating system and have long been widely used in the financial services industry.
When the Internet bubble burst in 2000-01, funding for start-ups dried up along with much of the demand for Sun's computers. Internet companies started buying cheaper Linux servers.
Since then, Sun, whose name stands for Stanford University Network, has tried to reinvent itself by acquiring companies and expanding production of Linux-based computers, but failed to revive its stock price.
Analysts expect Sun to report a loss of $1.35 billion on sales of $12.8 billion for the fiscal year ending June 30, 2009, according to Reuters Estimates. In 2001, it reported an annual profit of $927 million on revenue of $18.3 billion.
Sun spokesman Shawn Dainas said the company has had productive discussions with shareholders but declined to elaborate.
He added that Sun's technology bets are paying off, pointing to "tremendous" growth in so-called chip multi-threading systems that can handle more than one set of software instructions at once, as well as open storage systems, which combine open-source software with standard hardware.
"We are in a complex industry and our growth plan and progress can't be easily measured by our stock price," Dainas said in an e-mailed statement.
KKR declined to comment, while Southeastern did not return a call seeking comment.
Influential tech analyst Toni Sacconaghi of Sanford Bernstein in June cited Sun as one of three tech companies that could face investor activism this year. The others were EMC (NYSE: EMC) and Lexmark International (NYSE: LXK).
"The fact that [KKR's presence] has not led to discernible improvement in Sun's profitability also raises questions," he wrote in a note. "These stocks are at or close to multi-year valuation lows ... and offer distinct opportunities for value creation."
One business that Sun could sell fairly easily is StorageTek, a data storage business that it bought in 2005 for $4.1 billion. Bankers estimated it to be worth $750 million to $1 billion today.
Oracle (NASDAQ: ORCL) could also be a likely buyer for Sun's software business, the bankers said.
One business likely to stay in Sun is MySQL, the open-source database software maker that it bought for $1 billion this year. MySQL's performance has not yet justified its price, though it is seen key to Sun's growth plans, a person familiar with that deal said.
"MySQL is pretty core if you want to be the largest open-source provider in the world," this person said. "Sun feels it's a very strategic acquisition."
Furthermore, if Sun sold MySQL to a rival open-source company such as Red Hat (NYSE: RHT), it is unlikely to fetch more than $300 million, the first banker said.
Despite the fire-sale prices that bankers are citing for Sun's assets, Global Equities Research analyst Trip Chowdhry warned would-be buyers to think twice.
"If you buy this company you are just going to buy baggage," he said. "The cost structure is through the roof. The product road map is nonexistent and customers are leaving in droves. When you see these three things, only a dumb company would think of buying Sun."