Sun Microsystems to Layoff 4000 - 5000

By Nicole C. Wong
The Mercury News


June 1, 2006

Sun Microsystems's new chief executive bowed to Wall Street's demands for layoffs Wednesday by announcing the struggling computer server-maker will reduce its workforce by up to 5,000 people as part of a broad plan to stop financial losses.

The Santa Clara-based company, which employs 37,500 people worldwide, plans to shrink its workforce by up to 13 percent over the next six months. It will also shut down its Sunnyvale and Newark campuses, two of the four it has in Silicon Valley.

CEO Jonathan Schwartz said details about the job cuts, including what kinds of positions will be eliminated and how many pink slips will paper the Bay Area, will be worked out in coming weeks.

``At the outset, I know these changes will be tough for many employees,'' Schwartz told analysts and reporters during a conference call. But he said the turnaround plan will make Sun a company that is ``leaner and more efficient, as well as one that's simpler to understand.''

Industry analysts had mixed reactions to the announcement. Some had called for bigger workforce cuts of up to 30 percent, but most agreed that Sun needed to take action after four years of continuing financial losses.

``This is the bare minimum Sun needs to do,'' said Brent Bracelin, research analyst at Pacific Crest Securities. However, he added, ``There are other ways Sun can reduce the cost structure other than just laying people off. The focus strictly on headcount is a little short sighted.''

Sun is selling its Newark campus, which should result in annual savings of $30 million to $40 million, and vacating its leased facilities in Sunnyvale. It is also evaluating whether to shed other office sites, including ones gained through acquisitions. Sun employees will continue working at the Menlo Park campus and the Santa Clara headquarters campus as well as telecommuting from their homes.

The company also announced Wednesday it had removed a measure known as a poison pill provision that's used to prevent a hostile takeover. Schwartz said that action had no hidden message. ``I wouldn't look for any secret conspiracy there,'' he said to industry analysts. We're just being responsive to the shareholders.''

But Rob Enderle, principal analyst with the Enderle Group, didn't buy that.

``By eliminating the poison pill, they make themselves into an acquisition target,'' Enderle said. ``The consolidation of the real estate, the cutting back of costs related to long-term market growth, and the blanket reduction of employees are to improve the short-term -- and undoubtedly makes the company's financial attractiveness as an acquisition greater.''

The restructuring includes reducing the company's product line and scaling back research and development that is not core to its business. Those changes are expected to generate an annual savings between $480 million and $590 million.

Sun's goal is to boost operating income to at least 4 percent of revenue within one year. It aims to eventually boost that operating income to at least 10 percent of revenue.

``Our industry is littered with companies that try to be all things to all people,'' Schwartz said, ``and that's not Sun.''

Sun -- which sells servers, software, storage and services -- has been scorched by criticism that it was wallowing in an identity crisis, wobbling between being a hardware company and a software company after the key markets it served collapsed with the dot-com bust.

Frank Gillett, a principal analyst with Forrester Research, said Sun still isn't being clear about how the company is going to shift to make money. During the conference call, Schwartz ``talked about continuing to be a product company, but also being a services company,'' Gillett said.

``What's interesting that the management has a clear vision of how the industry will evolve in the long run,'' but it is experimenting with how to make money in the short run, Gillett added.

Schwartz said the company's 24-year-old vision -- ``that the network is the computer'' -- remains unchanged. But Sun will be shifting resources. It will be hiring salespeople and technical specialists while laying off people in other roles, including positions that duplicate efforts, he said.

Sun will incur restructuring charges ranging from $340 million to $500 million over the next several quarters, with most of the hit coming in the quarter ending June 30.

Financial analysts pressed Schwartz for insight on whether more layoffs would be coming and what the philosophy is behind which areas of the company will be pared down. He said it ``would be a little premature'' to talk about the workforce size for 2008 and that ``everything's on the table.''

Enderle, the analyst, said questions remain about the restructuring Sun announced.

``If their strategy is to prepare the company for a sale, there's a lot of good here,'' Enderle said. ``If their strategy is to take the company forward by itself, there are a lot of things to be concerned about.''