Sun's future up in the air after talks with IBM break down

Struggling vendor could seek another buyer if IBM deal is dead -- or try to survive on its own

The next step for Sun Microsystems Inc., after its apparent failure to reach an agreement with IBM on an acquisition, is to continue looking for a buyer, change its management - or just keep plugging along and pretend that nothing ever happened.

In terms of a sale, it's entirely possible that Sun could attract bids from Cisco Systems Inc., which is trying to move into the server business, or Fujitsu Ltd., which makes servers based on Sun's Sparc technology, or even Hewlett-Packard Co., as part of its perpetual market-share battle with IBM.

Another option is overhauling Sun's management in response to the company's continuing revenue decline and the reported collapse of the talks with IBM. There are even rumors that CEO Jonathan Schwartz could be replaced by chairman and co-founder Scott McNealy, who stepped aside as CEO and was replaced by Schwartz four years ago this month.

But Schwartz was McNealy's protégé, and the latter has publicly supported Sun's overall strategy under his successor.

Then there's the pretend-nothing-happened-with-IBM approach. Sun continues to develop new products and is expected to release its 16-core Rock processor later this year - albeit more than 12 months behind the original shipment schedule.

The company has done well sales-wise with the line of servers based on its UltraSparc T2 processor, which is showing revenue growth, as well as with its x86-based systems. But Sun isn't doing well enough, with revenues dropping nearly 11% in the last quarter and layoffs continuing under a restructuring plan announced in November.

The problem is that for now, no one really knows what Sun plans to do next - and so what's to motivate corporate users to continue buying new hardware from the company?

Despite the current climate of uncertainty, some customers will keep investing in Sparc systems because they have a commitment to the Sun architecture and changing to other technologies would be difficult, said Nathan Brookwood, an analyst at Insight64 in Saratoga, Calif. He pointed out that the phase-out of HP's Alpha processor, acquired via that company's acquisition of Compaq Computer Corp., lasted nearly a decade because of continuing demand from users.

But Rich Partridge, an analyst at Ideas International Inc. in Rye Brook, N.Y., said that new customers in particular might hold back on making any purchase commitments to Sun until the company's future plans are more clear.

Ditto for Judith Hurwitz of Hurwitz & Associates in Newton, Mass.: "In down markets, people run for safety," she said. "They want to go with companies they feel safe with."

Forrester Research Inc. analyst James Staten said that even before the acquisition talks with IBM began, many Sun users already were thinking about Linux and x86 servers as an alternative platform to Sparc machines running Solaris. Moving to a new platform "is a center-of-mind question question every three months among Sun customers," Staten said.

And regarding the Rock processor, Staten said that he isn't certain whether it will be able to compete against IBM's Power 6 processor or the latest Xeon server chips that Intel Corp. released last week.

Even if that turns out to be the case, Sun's Sparc user base is likely to remain attractive to IBM or other vendors. "I think most people would agree that their installed base of customers is a valuable asset," Brookwood said. And forcing those users to move to a new hardware architecture would only anger them, he added.

As for Schwartz, he has "a lot riding on showing growth [for Sun] or showing an exit strategy," Staten said. "And neither one has come through."

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