Sun starts to think different; plants private equity seed

Why would a company with $2.6 billion in cash lying around as of Dec. 31 raise another $700 million from one of private equity's biggest players?

That's a question worth a little reading between the lines since a few folks are perplexed. To be sure, Sun Microsystems' turnaround has taken another big step--the company reported fiscal second quarter earnings $126 million, or 3 cents a share, on revenue of $3.56 billion. But the investment by KKR Private Equity Investors, L.P., the publicly traded fund of Kohlberg Kravis Roberts & Co. (KKR) is more notable by far.

KKR, best known for its 1989 buyout of RJR Nabisco, has a massive portfolio that's well diversified. The private equity trademark is to buy undervalued assets, restructure and then cash out via sale or IPO.

That track record means Sun is up to something with its KKR partnership. One thing is clear: Sun, on the heels of its partnership with Intel, is thinking differently these days. Here are a few reasons why Sun may have linked arms with KKR:

--Sun wants to play the going private card. By partnering with KKR, Sun builds up its war chest and sends a clear message to investors: If it makes sense we'll go private. This move wouldn't be unheard of--there is a lot of private equity sloshing around and it has to go somewhere. Meanwhile, private equity firms will pay up for technology companies. For technology companies looking to revamp, going private can make sense. Seagate made a similar move a few years ago.

--Sun wants to go trolling for acquisitions. In a statement, Sun CEO Jonathan Schwartz said "we intend to use proceeds from this placement to pursue strategic opportunities for growth. We're looking forward to working with KKR to leverage its expertise, assets, global reach and relationships." Translation: Sun may go shopping.

--Sun needs to think different. The company has a strong intellectual property portfolio and could use KKR's guidance to monetize it. Don't be surprised if select assets get spun off into smaller companies.

Now KKR isn't giving Sun $700 million for nothing. The sum is evenly split between convertible bonds--debt that converts to stock at some point--due in 2012 and 2014. KKR will collect some interest in the meantime.

But the bottom line is this: KKR sees some value in Sun and its dollars say more about the company's turnaround than Schwartz ever could. 

In the Schwartz era, which began in April 2006, the stock has steadily been climbing out of the sub-$5 cellar, topping $6 in after-hours trading today. Another few quarters of profits and Sun will be allowed to take the "beleaguered" label off its forehead.