We don’t know what’s going on at Sun but somehow feel that there is a ball still in their court.Â At first we noted that some of the software assets (Java, MySQL) are very strategic and in some ways the current value of the company ($3.6B TEV at $6.60/share) might be worth these assets.Â Of course Sun comes along with over $13B in annual revenue, a bloated cost structre, dysfunctional management and declining viability versus competition from companies like HP to name one.
The IBM deal seemed like a home run for both parties were it not for the anti-trust concerns, some of which seem quite valid in areas of the business.Â The deal is highly accretive to IBM even at $12 or $13/share.Â So much so that we won’t even bother showing the math here.Â (Although you can start with the Sun TEV/R of 0.3x versus the IBM TEV/R at 1.5x and start to get the gist of it.)
Unfortunately Sun has been destroying businesses they acquire and shareholder value for a decade.Â (Before everyone throws their long-term charts at us showing what a rise they had in 1999, save it!Â They were destroying software companies by acquisition (with one or two clear exceptions) way back then to but it wasn’t recognized by the market and the bubble bailed them out.)Â Â Sun is obsessed with selling servers and so they focus on products like mySQL as a vehicle to move more Sun hardware.Â This linkage is artificial and not what customers want.Â They seek standardized (and now virtualized) hardware environments where they can efficiently run their underlying software infrastructure and company applications.Â They don’t want some specialized solution from Sun or anyone else.Â This is true for some esoteric applications but not for mainstream computing.
That Sun management still drives the company with this world view and business model is fatal for all concerned.Â We really are not trying to pick on Sun.Â And we do sympathize with employees there.Â Most of them are not to blame and there’s no question that there’s lots of “good stuff” to be had at Sun.Â But the strategy and the management approach have been rotten for so long it doesn’t make any sense to walk on eggshells about it.
We’ve looked at a set of proprietary server spending data from enteprise customers and Sun is in the Novell category in terms of technology roadmap, spending plans and vulnerability.
But would it be that hard for Sun to stop hurting themselves and get more aggressive about coming up with a strategy that is different and works?Â IBM was left for dead before Gerstner helped get it sorted out.Â There are great assets and opportunities still for Sun and a new approach could unlock them.Â The shares would be worth $12 or even more if they could just get on a decent footing.
[Disclosure: Research 2.0 has a small long position in JAVA.]