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Sunset for Scott
Wall Street would probably be elated if McNealy gave up one of his 3 roles at Sun Microsystems.
March 16, 2004: 1:08 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - It is time for Scott McNealy, the chairman, chief executive and president of Sun Microsystems, to step down from at least one of those roles.

The server company's stock is down more than 90 percent since March 2000, a decline far more precipitous than those experienced by any of Sun's major rivals. And revenues for this fiscal year, which ends in June, are expected to be $11.4 billion, 37.5 percent lower than sales in fiscal 2001.

Now I don't think that McNealy, who co-founded the company, should leave Sun (SUNW: Research, Estimates) entirely... although the hockey-crazed McNealy would probably have more fun running the Stanley Cup-contending San Jose Sharks. (He could even rename the team the Sparcs, after Sun's brand of semiconductors.)

But it's growing increasingly difficult to deny that change could be healthy. McNealy has been chairman and CEO since December 1984. He has been president, CEO and chairman since July 2002, when the widely respected Ed Zander, now CEO and chairman of Motorola, left the company.

Zander was also chief operating officer. But Sun has yet to name a COO to replace him. The company was not available for comment.

Falling behind

So instead of a clear number two, Sun has executives with titles such as chief strategy officer and chief customer advocate.

"Investors would feel greater confidence if they saw a flatter management structure" said Michael Cohen, director of research for Pacific American Securities. "Right now, it gives the appearance that it is a one man show with Scott."

That's not a good appearance to have. McNealy's us-against-the-rest-of-the-tech-world rhetoric is growing increasingly stale, especially since Sun has been the one notable laggard in what appears to be a recovery in the server market.

To that end, John Rutledge, manager of the Evergreen Technology fund, which owns a small amount of Sun, said he thinks the majority of Sun's problems are internal and not related to broader economic concerns.

The Sun is not shining
Sun was the only major server company to not post a sales increase in 4Q...and its stock has fared the worst in recent years.
CompanyMarket ShareRevenue Change*Price Change since 3/10/00
Sun Microsystems10.4%-1.7%-91.2%
* Year over year change from 4Q '02
Sources:IDC, Thomson/Baseline

Sure, Sun has finally taken some steps to address the decline in its business. It has jumped on board the Linux train at last. It also recently formed a partnership with semiconductor company Advanced Micro Devices to sell Sun servers that run on AMD's 64-bit Opteron chips.

But will this be enough to keep Sun from sliding further behind rivals such as IBM and Hewlett-Packard? Will it be enough to stop the momentum that Dell is showing in the server market?

IBM and Dell both gained market share in the fourth quarter, according to tech research firm IDC. Dell, currently the fourth largest server company, trailed Sun by just 1.8 percentage points. At the end of 2002's fourth quarter, Sun's lead over Dell was 3.7 percentage points.

And even though #2 HP lost some share, it still at least reported a 9.4 percent increase in server sales. Sun lost market share and reported a decline in revenue.

Follow the leaders

Looking ahead, Sun is only expected to report a 2.1 percent year-over-year increase in sales in its fiscal third quarter, which ends in April. In addition, analysts are projecting a loss of 3 cents per share. For the fourth quarter, analysts are projecting break-even results and a sales increase of only 3.5 percent from a year ago. "Sun is marking time, treading water on revenues," said Rutledge.

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Adding to Sun's woes, credit rating agency Standard & Poor's cut Sun's debt to junk bond status last week, citing "weak and inconsistent profitability". Even though the downgrade probably won't have a major financial impact on Sun since it has $5.2 billion in cash and investments and just $1.2 billion in long-term debt, the "junk" label is not exactly flattering.

And Sun's stock, which got off to a hot start this year, has plunged nearly 30 percent in the past month. So time may be running out on McNealy.

Brent Bracelin, an analyst with Pacific Crest Securities, said that if Sun still doesn't show any major signs of improvement by June, then there would be more pressure on the company to make changes. To be sure, there doesn't appear to be a revolt brewing among Sun shareholders along the lines of Disney and Michael Eisner, but it would still look good for McNealy to have a succession plan in place, said Bracelin.

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Sun Microsystems Incorporated
Corporate Governance
By Paul R. La Monica

He thinks Wall Street would react more positively if Sun hired someone from outside the company to be an heir apparent but added that Jonathan Schwartz, the executive vice president of Sun's software group, could be groomed for a larger leadership role.

If nothing else, McNealy could score some points with investors by taking part in a growing trend. Michael Dell, Larry Ellison and Tom Engibous, who started this year as the chairman and chief executive officer of Dell, Oracle and Texas Instruments respectively, have all recently decided to give up one of those roles. And the two biggest techs made similar moves years ago. Microsoft split the role of CEO and chairman in 2000. Intel did so in 1998.

So come on, Scott. What are you waiting for?

Analysts quoted in this piece do not own Sun and their firms have no investment banking relationships with the company.

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