Market Alternatives for Sun

It's past time to rethink what's been happening with Sun's shares and therefore to consider ways of attacking the fundamental problem that traders aren't investors and therefore don't behave like investors.

It seems to me that tech companies in Sun's position have two choices on responding to trader share price manipulation: play their game, or don't play their game.

All of the "don't play" scenarios I can think of involve protecting the share price by taking the company private - an approach that's somewhat self-defeating if the goal is to bring some realism to the public share price.

Still, while the traditional leveraged buyout would immediately benefit the traders causing the problem, there are ways this could be done. Sun could, for example, lend its employees money to buy and then hold company shares as other traders drive the price down -i.e. releasing funds for new purchases only when the price is falling, thereby using the trader's own money to gradually take enough shares out of their control to render the attacks pointless while continuing the public market commitment for liquidity.

The other alternative is to play the trader's own game back at them - and I think the two big guns there spin-offs and dividends.

If Sun were to announce a big dividend payout - say three bucks on a ten dollar share to be distributed among shareholders of record as of some future date like January 1st, 2009 it would reward investors, punish traders driving shorts, make the company less attractive as a takeover target and ultimately leave the share price tied more directly to operating results.

Spin-offs would contribute further to this effect. Spin-offs aren't really popular in the financial community or among executives but, unlike mergers and acquisitions, they almost always produce solid value for shareholders.

Sun has a services division that makes money, but restrains innovation on hardware and software sales -and it just wouldn't be hard to split those people off from the basic OS/software support functions and maybe buy them some of Perot's former managers to create a profitable looking acquisition target for IBM and a few others smarting over HP's idiotic EDS acquisition.

The culture clash between long term Sun employees and the StorageTek people has made that acquisition a bit of a disaster for both; and, while there isn't much substance left StorageTek isn't beyond re-creation as an operating entity with a share of its own -legalese aside, a hundred million in seed money accompanied by some key people, the right press releases, and a number of product development, patent, and marketing agreements could make the new StorageTek a viable acquisition target for someone else.

More interestingly, Sun has significant business opportunities its current structure will not let it pursue effectively and putting Sun money, and more importantly some key Sun people, into spin-offs designed to exploit those opportunities could provide tremendous value for Sun's customers, shareholders, and affected employees without adversely affecting established distribution channels.

There are, of course, a number of risks associated with doing any of these things, but the bottom line is that the layoffs and other Wallstreet appeasement strategies of the past have failed miserably -and nothing in the more traditional executive repertoire appears likely do any better.

It's past time, therefore, to rethink what's been happening with Sun's shares and therefore to consider ways of attacking the fundamental problem that traders aren't investors and therefore don't behave like investors - meaning that meeting Wallstreet's reflexive demands for more layoffs and cost cutting achieves nothing because corporate actions along these lines signal trading, not investment, opportunities.

The bottom line, I think, is simple: something has to be done, and both spin-outs and payouts look like attractive candidates for that something because both reduce Sun's attractiveness as a signaling vehicle for cross selling - meaning both should have the long term effect of tying the share price more and more closely to actual operating results.