David Callaway
Sun's Schwartz swings the ax
By David Callaway
Published: May 31, 2006 8:30 p.m. ET
Commentary: But Wall Street will only call for more
DavidCallaway
SAN FRANCISCO (MarketWatch) -- Sun Microsystems Inc.'s Jonathan Schwartz wasted no time heeding Wall Street's calls for blood, swinging the ax on up to 5,000 employees only five weeks after taking over as chief executive of the troubled computer hardware company from Sun co-founder Scott McNealy.
The announcement late Wednesday that the Santa Clara, Calif.-based company would cut 11% to 13% of its workforce in the next six months also came with a special bone for the hounds on the street -- the scrapping of its shareholder rights, or poison pill plan, to make it easier for a potential buyer to make an offer. See full story.
Now comes the hard part. What to do as an encore for an audience that doesn't understand anything but a one-act play.
That Schwartz, 40, was going to come in swinging was unfortunately a foregone conclusion. When Schwartz took over late last month for McNealy, who had been CEO since the company was founded in 1984, it was widely seen as a move designed to pave the way for job cuts, something McNealy had traditionally resisted. Less than 10 days ago, Sun Chief Financial Officer Mike Lehman said at an investment conference that a move was underway to "resize the company."
But less than a half hour after the announcement, Wall Street was already calling for more, and a knee-jerk rise in Sun SUNW, -1.85% shares of about 1.5% had evaporated by the time the company began its conference call with analysts. One analyst told MarketWatch that the cuts were the "bare minimum" that Sun could have done.
Tell that to the 4,000 to 5,000 Sun employees who are going to lose their jobs in painful and embarrassing layoffs over the course of the rest of this year as the analysts and shareholders bray for more sacrifices.
Sun's shares were down 70% at one point last year from their high five years ago when the Internet bubble was minting scores of new customers for Sun's web servers. They had already began to climb back from their bottom, however, as the company has unveiled a slew of new products to a changed marketplace.
But the competition with rivals such as Dell Inc. DELL, +1.32%, IBM IBM, +3.39% and Hewlett-Packard Co. HPQ, -0.14% continues to heat up. And obviously the Wall Street kudos going to new Hewlett-Packard CEO Mark Hurd for starting to turn that ship around -- at the cost of 15,000 jobs -- are not lost on Schwartz.
But when the bloodletting is done and the cost side of the balance sheet looks better, unless there is a plan to create new products, markets and hype around the company's prospects, then you're left with a group of analysts and shareholders who are going to want more cost cuts to keep the shares propped up. Remember Carly Fiorina?
So Schwartz has taken the first step of his forced march down the cost-cutting road. And no doubt as soon as Thursday Wall Street will be calling for more. But unless the idea is simply to pretty Sun up for a potential buyer, these painful sacrifices must be followed by some serious sales growth and product expansion.
Wall Street got its way this time. But McNealy is still with the company, and Schwartz certainly realizes that that these cuts are only a Band-Aid on a bigger problem.
The technology graveyard is littered with companies that tried to cut their way back to their innovative heydays, from Silicon Valley to Route 128. Sun does not need to be one of them. There is still time.
SUNW
HPQ
Sunworks Inc. U.S.: Nasdaq: SUNW
Dell Technologies Inc. Cl C U.S.: NYSE: DELL
International Business Machines Corp. U.S.: NYSE: IBM
HP Inc. U.S.: NYSE: HPQ