Struggling Sun faces difficult choices about future

Bad times just keep getting worse at Sun Microsystems, and the vendor may face hard choices abouwhich parts of its business to keep and which to shed.

Two weeks after reporting a $1.7 billion quarterly loss, Sun announced on Friday that it would lay off 15% to 18% of its workforce.

It was seen by analysts as a necessary step — but by no means a cure-all for a company that has been losing money and credibility with investors since the bursting of the dot-com bubble in 2001. “I just think they had little to no choice,” says The 451 Group analyst Jay Lyman.

Lyman speculated in a report several months ago that Sun might be acquired, saying that “Sun's sunken stock price creates a relative bargain considering its roughly $4 billion cash on hand, sizeable intellectual property and patent portfolio, and of course, its respected technology and products.” Other analysts have questioned whether potential acquirers such as IBM or HP would even want to buy Sun. It's hard to think of a vendor that would shell out cash for Sun's servers, storage and open source software businesses all in one fell swoop, says Enterprise Strategy Group analyst Brian Babineau.

One common belief is that Sun will sell off portions of its business and focus on those that it believes offer the most chance of long-term success. When Sun announced workforce cuts last week it also detailed a reorganization of business units that reflects a commitment to open source software, an area Sun has a strong foothold in through ventures such as OpenOffice, OpenSolaris, MySQL and open source-based storage.

But several analysts say Sun still hasn't chosen a specific enough focus. “Is it a hardware company? Is it a software company? Is it an open source company?” Lyman asks.

Babineau believes that Sun has to sell part of the company, but it's hard to say which one.

Based on what they report on Wall Street, it's hard to tell what's making money and what's not,” Babineau says. “They've been very bullish on their storage business. That generates positive cash flow. I think that really could be funding the rest of their business at this point.” (Compare storage products.)

A vendor in Sun's predicament could sell off a loss leader and focus on remaining businesses that generate cash flow, or sell one of its more profitable businesses to gain a one-time cash infusion that can be invested in remaining assets, Babineau says.

“I think they can turn it around, but they won't turn it around as is,” he says. “They have to shrink it up, take a cash infusion from selling a core asset and grow that smaller business.”