The New York Times
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November 15, 2008
Crisis Spreads to Tech Sector as Sun Plans to Cut Work Force
By ASHLEE VANCE
Joining a rapidly growing list of technology companies reeling from the financial turmoil, Sun Microsystems, which sells server computers, has started a broad restructuring that could see up to 6,000 employees lose their jobs.
Before the stock market opened Friday, Sun disclosed that it would lay off 5,000 to 6,000 workers, or 15 percent to 18 percent of its work force. The company, already dealing with layoffs announced in May, expects to save $700 million to $800 million a year as a result of the moves, while also taking up to $600 million in charges in the next 12 months.
“The focus here is to eliminate some of the inefficiencies that have made it hard to do business with Sun,” said Jonathan I. Schwartz, chief executive at Sun, adding that a “new economic reality” had taken hold in the market. Sun shares, which initially rose as much as 12.7 percent, were down 1.2 percent, to $4.04, in late morning trading.
In the last two weeks, several of the technology industry’s biggest names have issued dire forecasts.
Last week, Cisco Systems, the largest provider of network equipment, warned that sales in its current quarter could drop 10 percent. Intel, the world’s largest producer of chips used in PCs and servers, added to the gloom this week saying its sales for the current quarter could plummet as much as 19 percent as both consumer and corporate customers had pulled back on technology spending.
In addition, other Silicon Valley companies tied to the chip industry, including Applied Materials and National Semiconductor, have started layoffs.
While many of the companies focus on corporate sales, others closer to consumer markets are suffering as well. Qualcomm, which makes chips used in cellphones, said mobile device makers have suddenly cut back on their orders. Nokia, a large cellphone maker, confirmed as much Friday by lowering its industrywide sales outlook for the fourth quarter and announcing further cost cuts in 2009.
For many companies, the sudden drop in orders started in October and worsened in November.
“Even during the 2000 bust, the decline was more measured,” said Ashok Kumar, an analyst with Collins Stewart. “This seems to be going into a freefall.”
Sun’s change in strategy follows a period of intense scrutiny for Sun and Mr. Schwartz., as the company has fought longer-term problems. Sun, based in Santa Clara, Calif., has battled for years to offset a slow, steady decline in its primary high-end server business.
Defending those sales has become more difficult as Sun’s customers on Wall Street curtailed their technology spending because of the financial turmoil. Sun is more dependent on Wall Street business than rivals like I.B.M., Hewlett-Packard and Dell.
“We were certainly the first to enter this,” Mr. Schwartz said, “and I would like to believe we will be the first to exit it.”
Late last month, Sun reported a first-quarter loss of $1.68 billion and a 7 percent year-over-year drop in revenue to $2.99 billion. At the time, Sun cautioned that it would probably restructure to bring costs in line.
While Sun has talked of a “new reality,” its investors have been reacting to the company’s larger issues for some time. Sun’s shares have lost more than 80 percent of their value in the last year, reducing the company’s market value to $3 billion.
In its last fiscal year, Sun posted revenue of $13.8 billion and has $2 billion in cash.
Southeastern Asset Management, an investment firm based in Memphis, has increased its stake in Sun to more than 20 percent in the last year. Recently, it disclosed an intention to talk with Sun’s management and possibly other companies about the ways to make the most of Sun’s assets, which include a vast software intellectual property portfolio.
In addition, Relational Investments, founded by the activist investor, Ralph V. Whitworth, has purchased close to 15 million shares of Sun since the end of June, giving it close to a 3 percent stake in the company.
Mr. Schwartz maintained that these large Sun investors agree with the company’s strategy. “I just met with Ralph,” Mr. Schwartz said. “We’re all focused on the same thing.”
Sun’s management continues to remain optimistic when speaking about the company’s future, pointing to a number of fast-growing hardware and software businesses. The company has spent the last few years developing products and acquiring software makers, leaving it with what many analysts consider a strong portfolio. The major challenge has been growing these businesses at a rate strong enough to offset declining sales from Sun’s traditional businesses.
In an effort to push things forward, Sun has realigned its management structure to create a pair of software organizations aimed at different parts of the technology market. The moves include the resignation of Rich Green, formerly executive vice president in charge of Sun’s software business. Mr. Green returned to Sun just two years ago in a bid to inject new life into the company’s software business.
Sun has bet on an open source software strategy where it offers free access to top products such as its Solaris operating system and MySQL database. The company argues that this model increases interest in its products and can translate into hardware sales.
With plenty of cash on hand and a sympathetic board, Sun has rejected calls for more radical action such as selling off part of its hardware business or going private.
Analysts, however, remain concerned that Sun’s costs are too high given current economic conditions and the ongoing decline in sales.
“This by itself is not enough,” Shebly Seyrafi, an analyst with Calyon Securities, said.
Mr. Schwartz declined to delve into all of the specific areas where Sun’s job cuts will take hold, although he did say that the sales group will be affected.
“We are not canceling products or exiting businesses,” Mr. Schwartz said, adding that Sun remains committed to using the open source strategy as a way of trying to attract business in cash-strapped times.
“We are going to go plow the market and auger it open with the world’s most compelling price tag,” he said.