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Sun Microsystems to Cut Up to 5,000 Jobs, Reduce Real Estate Holdings

Posted on: Thursday, 1 June 2006, 06:00 CDT

By Michelle Kessler

SAN FRANCISCO -- Struggling computer-maker Sun Microsystems said Wednesday that it plans to cut 4,000 to 5,000 jobs in hopes of becoming profitable again.

The cuts will reduce Sun's staff by 11% to 13% in the next six months. Sun also plans to slash its Silicon Valley real estate portfolio by selling one office park and ending its lease on a second. It will retain two campuses in the area.

The initiative is the first big move for new CEO Jonathan Schwartz, who took the top job from Scott McNealy in April. It's expected to save Sun $480 million to $590 million a year, he said. (Sun will incur $340 million to $500 million in restructuring charges in the next few quarters.)

"I know these changes will be tough for employees," Schwartz said. But, "We are very confident we are making the right choices," he said.

Investor reaction was muted. Sun shares fell a penny to $4.62 in after-hours trading on the news, released after the markets closed.

Many investors had anticipated cuts and were hoping for more, says equity analyst Brent Bracelin at Pacific Crest Securities. Schwartz's plan "is the bare minimum," he says.

Sun -- the company that once declared itself "the dot in dot-com" -- has struggled since the Internet bust of 2001. It hasn't posted an annual profit since, despite cutting more than 12,000 jobs and acquiring storage-maker StorageTek. Among the reasons:

*The popularity of inexpensive servers. Sun's core business has long been specialized, extremely powerful computer servers that can cost tens of thousands of dollars. But the market is moving away from these megaservers, says tech analyst Jim Garden at Technology Business Research.

Instead, companies are buying groups of smaller, standardized servers that can work together, he says. Sun started building such servers in 2003 through a partnership with chipmaker Advanced Micro Devices. The new line has done well, Garden says. But an AMD-based Sun server costs as little as $745 -- a fraction of Sun's most lucrative computers.

*The free software strategy. Sun now offers several versions of key programs, including the Solaris operating system, for no charge. The goal is to hook businesses on the programs, in turn prompting them to buy more hardware and services from Sun.

That type of strategy takes years to pay off, yet instantly slashes revenue, Garden says. Sun also risks alienating the consulting firms that it partners with, such as Electronic Data Systems, as it touts its own service offerings, he says.

But Sun might yet bounce back. Its computers are a mainstay at giant companies such as eBay and American Express. And its Java programming language is growing, Garden says. "They're clearly at the crossroads," he says.

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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