Mr Schwartz, Sun’s president, called the rumors a complete joke, and Mr McNealy, Sun’s chairman and CEO, suggested that somebody who claimed to have insider info is laughing, as the story enabled that person to make a quick profit, since the news sent Sun’s stock up to nearly $4 a share.
The story in question ran in BusinessWeek’s Inside Wall Street column last week, and it suggested that someone who was a hedge fund manager said that Sun was considering a leveraged buyout of the company, paying perhaps as much as $5 to $5.50 a share for the company, or about $16 billion to $18 billion for Sun.
That would be a pretty hefty premium to pay for Sun, which is in the midst of some interesting and challenging product transitions – moving away from its monolithic Sparc processors in its servers and workstations and toward Opterons and multithreaded Niagara processors at the low-end and Fujitsu’s Sparc64 and its own Rock processors (which have even more threads) at the high end of its server product line.
Sun is also transitioning from charging for its Solaris Unix variant to developing an open source version of the program and moving toward a for-fee, add-on services model for Solaris. Moreover, the company is breaking new ground by charging low, per-employee fees to use some or all of the Java Enterprise System middleware stack or to use the Linux-based Java Desktop System on X86 PCs and workstations. All of these transitions are underway, and with $7.5 billion in cash in the bank – about three quarters of revenue – Sun is under pressure, but certainly not at risk of becoming insolvent.
At least some people thought it sounded like a good idea, since Sun’s shares shot up 14% on Friday morning. And the BusinessWeek story gained some credibility in that it made reference to Silver Lake Partners, which took disk maker Seagate Technology private four years ago for $2 billion and was one of the many venture firms who recently took software and services provider SunGard Data Systems private with an $11.3 billion LBO.
But the numbers in the BusinessWeek story did not add up, and it would take a lot more than this to bring Sun private or for any other company to acquire it.
Do the math. Sun has been trading at around $3.50 a share, and everybody on the planet knows Sun has $7.5 billion in the bank, which is worth about $2.30 a share. So just to acquire Sun with no premium at all, you’d have to pay at least $5.80 a share just at face value, unless institutional investors and large Sun shareholders (like the top brass at the company) were willing to just move their shares over to the new owner (Sun and its LBO partner) with no premium.
Then, you have to add in the value of some of the pieces that Sun might sell if it were private. What is Java worth to Microsoft if it could buy it and absolutely control it? What is the value of the future Sparc servers with the Niagara and Rock processors? Any way you look at it, the numbers in the BusinessWeek story are too low – notwithstanding the cynics out there that say Sun is worth even less than its current stock price and deserves no premium. Just because you can come up for some reason to justify a precise number doesn’t mean the reasons are scientific. The stock market is only as scientific as gambling, after all.
Moreover, what does going private allow Sun to do that it cannot do as a public company? If it wanted to take the hatchet to employees, it surely could have done that, and clearly Mr McNealy doesn’t want to do this or else he would have done it at least four years ago. Mr McNealy and his team want to change Sun, and as long as they can keep selling enough of what they’ve got to pay for the engineering and marketing to get them to where they want to go, you can bet that $7.5 billion that Sun is most certainly not going to do an LBO.
Perhaps more interestingly, the idea that someone would buy such a troubled (but highly respected) company certainly fits with the buy low, sell high motto of Wall Street, but to put it plainly, Sun is a $10 billion company and it is just too big for most companies to swallow, and those that could eat Sun – Dell, IBM, Fujitsu, Microsoft, Hewlett Packard – would not have an easy time digesting the acquisition, much less rationalizing it. Fujitsu is the most obvious buyer for Sun, and if the fecal matter starts heading for the oscillating cooling device, Sun will disappear into the gaping maw of Fujitsu and you won’t even hear the burp afterwards.
More likely though, Sun will find its own way out of the woods, and it will acquire companies. Buying itself out of the stock markets and away from the complaining hoards of Sun investors, who have seen the company fall from a $200 billion market capitalization in the boom years of the dot-com bubble to around $12 billion these days, does not solve any of Sun’s problems, which, to its credit, Sun’s top brass is focused on. They are innovating in terms of packing and pricing, and while there is not a lot of revenue traction and certainly no substantial profits from the efforts, unless Mr McNealy, Mr Schwartz, and the rest of Sun all get personality-altering head trauma, they are committed to the current course of experimentation, patience, and employing as many people as possible to do the innovating they think needs to be done.
You don’t have to like that, but Sun’s stance is worthy of respect. By investing in the long-term strategy, Sun is already doing what private companies can do best – and what most public companies, which only think in 13-week units of time, cannot afford to do because of the short-sightedness imposed by Wall Street.
