Sun's LBO Rumour

Sun's LBO Rumour

Summary: taking it private as a means of getting servicesout of the network computing businesswhile raising both cash returns and the share price for SUNM holders makesperfect, coldly analytical, sense to me.

TOPICS: Oracle
Sun's annual shareholder's meeting last week produced some odd rumblings, one consequence of which was to make me re-consider last spring's rumours that Sun's management was considering a leveraged buyout.

According to gossip at the time the idea was to use the company's cash on hand (then about $7.3 billion) to take the company private, sell off unprofitable assets, and then go public again as a leaner, meaner, money machine. At the time I thought the first part of this was a great idea - an opportunity for the SUNM company to sell its hardware, software, and research businesses to its own managers and employees while leaving the Services business and its managers in place.

That's not quite what rumour said they were planning; but consider the benefits. The services people were hired for their ability to sell - and that's just what they've been doing. With nearly half Sun's revenues (before StorageTek) and only about 15% of its costs, the new SUNM would look hugely profitable on day one, SUNM investors would see their shares increase significantly in value even while getting some cash out of the company, and the Services people would finally be able to concentrate on selling what's selling instead of being crippled by Unix.

Meanwhile, of course, Sun's non Services employees and customer base would benefit significantly both from seeing Services go and from the enthusiasm that goes with an employee owned technology company.

Pure magic: everybody a winner -but it didn't happen then and I don't expect it to happen now.

Economic theory says that markets are rational with investors coldly analysing corporate value to price shares at roughly the net present value of future profits. That's theory: in practice google sells at $360 today for a $100 billion market cap on revenues of around $6 billion while Sun sells below $4.00 for a market cap of $13 billion on annual revenues of $14 billion.

Google is desperately trying to diversify, but is trapped in intensely competitive markets everywhere it has gone so far, has a core business that's at risk to the next good idea to come along, and seems to have reached the limits of its initial growth spurt. Sun, meanwhile, currently makes the fastest and cheapest x86 machines, has a two to three year lead in the SMP/CMT processing revolution that's about the engulf the industry, and offers the only open source software "stack" reaching from the desktop to the Fortune 100 data center.

So how is this market situation possible? Well, obviously, economic market theory is wrong - Houdini, even with the aid of Microsoft Excel, couldn't make these share prices fit theory.

Nobody really knows what those prices do reflect (but check back here Friday). In my opinion, however, Sun is artificially depressed because there are people who talk the share down no matter what happens at the company, and google is artificially inflated because there are lots of people betting on their ability to get out and leave someone else holding the share when it crashes.

I think it would be immature of Sun's management to respond to last week's shareholder "unrest" by taking their company and going private - but taking it private as a means of getting services out of the network computing business while raising both cash returns and the share price for SUNM holders makes perfect, coldly analytical, sense to me.

Topic: Oracle

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  • Solaris was a major asset.

    Now they've open sourced it. I thought the reason for this questionable move was selling services.

    I'm probably not following your argument completely. Wouldn't shedding services make open sourcing Solaris a (more) obvious blunder?

    On your main topic.

    The market is irrational, you're right.
    But in its simplistic way, the market has understood that the future (and present) belongs to cheap software on cheap hardware.

    Sun is a small company making quality high priced hardware. They've also moved slowly and reluctantly toward the cheap-on-cheap paradigm.
    But being a small company they need a higher mark-up than would a large company.

    Again thinking simplistically, Sun will not be able to underprice mass market hardware makers. And with Linux and Windows both growing rapidly, the cheap software is not going to be Sun's either.

    So Sun is a company with strengths that apparently no one wants which has an unfortunate tendency to give away the assets that might persuade people that the company can go against the tide.

    Novell and Sun are probably the large IT companies considered weakest these days. I think they owe it all to management.
    Anton Philidor
    • But - Sun undersells Dell

      by quite a margin - and all that cheap Linux software runs fastest/cheapest on Sun hw.

      So no, I don't think they're a small company, I don't think they make over priced hardware, and I don't think open sourcing Solaris was a mistake.
      • Facts mislead.

        I did agree that markets are irrational.
        A narrative develops about a company, and whether that narrative is true or not, it affects the price of a stock.

        Look at Microsoft. Still by some measures the greatest profit generating machine ever known, but because they've achieved so much for so long, people are bored.
        A company comes along that appears to threaten Microsoft, and investors push the share price up rapidly.
        The company then fails, like all those Linux companies years ago, and investors apparently do not draw the conclusion that Microsoft is just about unassailable.

        I was telling a friend this theory about the significance of a narrative, and he told me that he had perfect proof: Sun.
        He had invested in the stock based on new products in the pipeline, but those products had almost no impact at all.

        He promised never to base his views on facts again. Then he told me about his investments in small biotech companies.
        Well... if facts are inconveniences...
        Anton Philidor
      • And why wasn't open-sourcing Solaris...

        ... a mistake? The value of Soplaris IP has been reduced, cerainly.

        I thought the reason was past investor complaints. As you know, the investors wanted Sun to drop its R&D budget and rely on open source to save money.
        Sun management, to its credit, refused to do that. But they did make Solaris open source, which gave them the argument that they may have reduced their costs.

        They also get an advantage in their competition with Red Hat among those for whom ideological purity is essential. You wouldn't think opposition to proprietary software could drive even a small market, but apparently it does.

        Difficult position, though, when Sun has to consider Red Hat rather than IBM or Microsoft its competitor.

        They are a small company by volume. Apple is also a small company in this context.
        In doing comparison, please consider the whole company.
        Anton Philidor
  • I am waiting

    until Sun stock hits about .0000001 cents each. THEN I WILL BUY Sun for a thousand bucks . . .
    Roger Ramjet
  • Sun buying out Sun...

    Take a look at Sun 2005 10K.

    Still loosing money. Operation income -$377M. Due to interest and other investment (MS settlement)they narrowed down to -107M$.

    Fighting US GAAP

    Computer Systems product revenues (-0.5%)
    Network Storage product revenues (-13.4%)
    Support Services revenues 1.1%
    Educational Services revenues 9.9%

    Support services, is just maintenance, but with new system sales... this business will be loosing money quite soon.

    A big red light (-7.3%) in R&D... of the -141 Million decrease, -125M are primarily due work force reduction!!!.

    Go page 42.
    Liquidity, Capital Resources and Financial Condition.
    Botton line -$90M

    Go page 48 Risk Factor.
    One word. Pitiful
    Once the all mighty SUN... now criying a river over IBM, HP, Dell, Microsoft. Really PITIFUL!!!.
  • Fastest x86? Leader in CMT?

    Can anyone backup the "fastest x86" server claim?

    As for the claim that Sun is leading the way in CMT, that remains to be seen.