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Friday, October 17, 2003

Merrill to Sun: 'Cut and Focus' or Be Acquired

The Merrill Lynch note urged the Santa Clara, Calif., company to drop some product lines and cut its costs by reducing headcount between 5,000 and 7,000. It also urged Sun to "focus on creating mission-critical computing systems where it can add value through innovation.

"That includes operating systems (Solaris, Orion), system architecture (blades), systems management (N1), and services."

The note also said it was "tempted to advise giving up on middleware, but the sedimentation trend of middleware moving into the OS [operating system] and the disruptive pricing of Orion (Java Development System) may be a hand worth playing though the selling model is unclear. Sun has made strides in improving its maintenance contract attach rates but may need to invest more in consulting/systems integration (though we don't see a major acquisition)."

It also urged the company to de-emphasize its SPARC processor system and save the roughly $200 million to $300 million that Sun spends on research and development for the processor systems.

"At the same time, Sun can't just dump SPARC outright given the size of the installed base and importance of migration paths," Milunovich wrote. "Customers must be assured that there will be multiple generations of SPARC to support their needs, especially high-end customers, much as HP has had to do with PA-RISC. The pure Solaris/SPARC story would be gone, but it already is."

The note was also hard-hitting about Sun's Java strategy, urging the company to spin off its Java division, asserting that "Java has been a technology success, a so-so branding effort, and a financial failure."

The note urged Sun to "return to its roots while looking to the future." Sun is an innovator, it continued, "but even IBM became selective about its R&D efforts when the red ink flowed. [Sun's]Solaris, Linux, Orion, Mad Hatter, N1, SPARC, x86, storage, Java-'The Network is the Computer' tent is bursting at the seams," he wrote of some of Sun's main product and services lines.

But Milunovich wrote that a large installed base of customers and strong balance sheet will only act as brakes on a "slippery slope to the bottom of [a] ravine filled with carcasses such as DEC, Data General, Compaq, and others."

Lets see how the episode goes. Any Gladiators on your side Sun ?

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