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Analyst Takes Sun CEO to Task

A research report acts as an open letter on what the computer maker needs to do to survive.

October 03, 2003|From Bloomberg News

Merrill Lynch & Co. analyst Steven Milunovich on Thursday offered a plan to revive "bloated, underachieving, unfocused" server-computer maker Sun Microsystems Inc. -- including a personality makeover for Chief Executive Scott McNealy.

Warning that Sun is headed for a ravine "filled with carcasses" of defunct computer companies, the analyst distributed a research report written as an open letter to McNealy and Sun's board. Milunovich said they should slash as much as 19% of the staff and settle on a single new mission.

The report stood out for concluding that Sun would "become irrelevant to most users and eventually be acquired" unless McNealy changes gears. Wall Street analysts have tried to regain credibility since government investigations showed some of them have slanted recommendations in pursuit of investment banking business. Milunovich is the technology strategist at Merrill, the world's biggest securities firm by capital.

"It's good to see pieces written like this," said Stephen Kensinger, who helps manage $120 billion at Wells Capital Management in Minneapolis. "The problem has been if you're a little too blunt [and] you take a tack that goes against management, next time, who knows if they'll answer his call or not."

Milunovich's recommendations for Sun include cutting as many as 7,000 jobs and spinning off its Java programming language to restore profit after two years of losses totaling more than $4 billion. Dell Inc., IBM Corp. and Hewlett-Packard Co. have taken sales from Sun by using Microsoft Corp. software and Intel Corp. chips for many of their lower-cost products.

McNealy, 48, founded Sun in 1982 with three friends and promoted the idea that "the network is the computer."

That was lost on many executives and analysts until the Internet's mid-1990s popularity explosion drove demand for powerful computers that connected together easily. Sales grew 21% a year on average from 1995 to 2001.

McNealy castigates rivals publicly and has called Microsoft's Windows operating system, which runs about 90% of personal computers, a "hairball." He has called IBM's Regatta server "regretta."

The CEO's "brash and contrarian" personality hinders Sun's ability to set priorities and is "getting old," Milunovich said. Sun, he added, needs an operating chief to replace Ed Zander, who quit last year after helping the company win its biggest orders and serving as a moderate counterweight to McNealy.

Sun shares fell 5 cents Thursday to $3.20 on Nasdaq. They closed at $56.78 on Oct. 1, 2000. Merrill Lynch holds 14.5 million shares of Sun.

"It's stronger than a normal research report" because "Scott to a large degree has been an impediment to what needs to be done," Milunovich, who has covered Sun since 1989, said in an interview.

Sun, which has eliminated 8,300 jobs in the last two years, already has cut costs, increased cash and investments and introduced products, spokesman Andrew Lark said.

"The company has never been more focused," Lark said. "Mr. Milunovich has been on this path for some time now. If he would take the time to attend more of our conferences, he'd learn about what is going on at Sun."

McNealy was traveling and declined to comment, Lark said.

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