Dark days for Sun's shining star

Almost 80 percent of Sun Microsystems' market value has disappeared in the past eleven months.

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By  Sean Cronin Published  November 14, 2008

Scott McNealy was one of the original Silicon Valley trailblazers, famously coining the phrase ‘have lunch or be lunch'. But as his company's stock continues to slide, does Sun Microsystems now risk being served up on the menu?

Scott McNealy talks confidently for a man who has seen almost 80 percent of his company's market value disappear in the past eleven months.

"I don't know what the market did on Thursday or Friday. Haven't looked. Haven't checked. Don't care. We've got $3.3bn dollars of cash in the bank and I don't need to borrow any money," says the Sun Microsystems chairman with characteristic swagger.

McNealy's reputation for brashness precedes him. He once famously declared: "Have lunch or be lunch". It comes to mind as I wait for him to finish his burger before our interview can start.

He doesn't take long to devour it. Lunch on the run has been part of McNealy's life since he stepped down as CEO two years ago to become the company's ‘door-opener' - and has been clocking up air miles ever since. Not that he needs any of them. He earns about $6.5m as chairman of Sun and holds stock valued at about $59m.

McNealy served as CEO of Sun for two decades, a long time at the helm of such a large public company. Sun is the world's fourth-largest maker of servers - the computers that run company networks and websites.

Now he spends much of his time traveling the world and talking to customers or people he wants to make customers. He doesn't miss his old life one bit.

"I was in that ‘piniada' for 22 years; I don't do that any stuff anymore" he says.

Unlike some other American business leaders who have visited the Gulf this year, McNealy says he isn't on any sort of fund-raising mission.

Advanced Micro Devices, the second-largest maker of personal computer processors, said last month that it would spin-off its factories into a new unit into which the Abu Dhabi government would invest about $2.1bn - helping AMD focus on designing chips and allowing the emirate to further its economic diversification aims. Sun Microsystems has no such requirements.

Despite McNealy's confidence, Sun Microsystems is hurting. If US computer stocks have had a bad year, then Sun Microsystems has had an even worse one. The company has lost almost 80 percent of its value over the past year.

The severe downturn in the US has encouraged Sun to increase its presence in emerging markets such as the Gulf, and it formed a sales group to tap demand from emerging economies including Eastern Europe, Latin America and China, in June.

"Emerging markets means growing markets and we're going to be putting more dollars into them," says McNealy, who delivered the keynote address to the region's annual gathering of technology professionals, called ‘GITEX', in Dubai last month.

Nevertheless, he is cautious about sustaining the runaway growth of the industry in the Gulf.

"Here in the Middle East, we've been growing at significant double digit compound annual growth - probably a little faster than I feel comfortable with," he says.

"I think 15 to 20 percent is very comfortable. Less than 15 percent growth, I feel we're not growing fast enough. Over 20 percent compounded growth for too long - there's no company able to successfully grow like that in a services kind of business. You need to be able to support the customers, train the people - that's the part that gets complicated and you don't want to blow it."

Sun posted its second loss in three quarters last month as corporations cut back on their technology spending around the world. It lost $1.68m in its first-quarter, compared with a profit of $89m a year earlier. Server sales fell 15 percent in the quarter from a year earlier.

McNealy declines to predict how the company will perform in the coming quarter, and neither did chief financial officer Michael Lehman offer a forecast for the rest of the year when he spoke to analysts on a conference call which followed the company's results on Oct 30.

The worst financial crisis in 80 years has hit the company's sales, largely as a result of its exposure to financial services companies.

Jonathan Schwartz, who replaced McNealy as CEO two years ago, told investors on a conference call that liquidity problems were preventing companies from spending on new servers.

Despite declining server sales in the US, McNealy is not downbeat on the country's prospects for emerging from the slump.

"I've always had this theory that things can go back the other way as fast as they went down. This was a pretty precipitous drop, so it could rebound quickly. There is still lots of cash in the world, and credit markets could free up very quickly again," he says.

In the meantime, the Gulf offers a potential buffer against declining server sales in some of its more established markets.

He points to oil and gas, telecommunications, financial services and e-government as "big opportunities" for Sun in the region - but he rules out any AMD-style deals or moves to establish manufacturing hubs in the region.

"We've outsourced most of our manufacturing already - We do final assembly and test in different geographies, but were not a factory or people-intensive business. We're an R&D and engineering-intensive industry - so the best chance that we will make an investment here is if our developer community grows here, then this becomes an attractive place to find engineers and smart people.

"There may be smart people here but they aren't trained in chip design or computer design or developer tools."

Despite the crisis facing the global economy, declining server sales and Sun's tanking share price throughout most of 2008, McNealy is clearly confident that his industry will rebound and that Sun will come through shining. As for the prospects for the wider US economy he is similarly sanguine.

"The fact that we lost a few banks is no big deal. There are some folks who did pretty well. Now they're out of jobs, but they're not going to miss many meals."

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