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Sun's LBO Rumour

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.

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.