Is the Linux community watching a setting Sun?

The title of this post was a headline that was probably written by an overly sensationalistic editor at http://www.searchenterpriselinux.com.  The actual article, though, was written by Pam Derringer, was a pretty balanced piece (although it obviously could have been more in-depth; given length and time constraints, she talked to as many people as I think could have been expected, including a Sun spokeswoman, two analysts from different analyst companies, the chair of Apache Software Foundation, a Sun customer, and so on).

I’m not sure I’d agree with Jim Jagielski when he claims that Sun has the “best and brightest business people in the world,” though.  As I said in the article, and as I’ve said before, I have nothing but the highest respect for many of Sun’s engineers, especially those who work on Solaris.   But their business people?   I’m not so sure they have the best and brightest… in fact, I think that’s one of Sun’s greatest problems right now.  Compare that with the job that Mark Hurd has done with HP, or with the work done by the executives at my employer (IBM), and I’m not so sure a strong case can be made for the excellence of Sun’s business folk.  (I mean, how many people still believe that the $2 billion dollars which Sun spent to acquire Cobalt Networks, or the $4 billion dollars which Sun spent to acquire StorageTek, or the $1 billion dollars which Sun spent MySQL, were all good ideas?   Sun is currently valued by the market at $2.4 billion dollars!)

My bigger concern at the moment, however, is what happens if Sun gets purchased by a rival or by a corporate raider and gets broken up for parts?   Since November 19th, when Sun’s stock price crashed through $3.27 (and has hit a low of $2.60 recently), it has been trading for less than its per-stock cash value.  I say that not out of a sense of Schadenfreude, but out of concern about what happens if someone decides to buy the company, lay everyone off, and even after paying all of its debts, the resulting cash left over would be more than cost of completely buying the company — all of the real estate, the inventory, and the patent portfolio would all be pure profit.

It’s the last I’m most concerned about; Sun has a very large patent portfolio!   What if it fell into the hands of a patent troll?   What damage could be done to not just Linux and the OSS comunity, but the software industry as a whole?   Suppose Sun really does have patents that read upon many of NetApp’s products?   If those patents fall into the hands of a patent troll, NetApp would no longer be able to negotiate a peace settlement based on its patents (if they survive the on-going patent re-examination process) that read on ZFS, since the patent troll would no longer be making any products based on ZFS.   Maybe somewhere in Sun’s patent portfolio, there are patents that read on the GNOME and KDE desktops, but since Sun is trying to ship those with its Project Indiana/Open Solaris dekstop, it’s not bothering to assert them at this time?    What if a patent troll, perhaps one funded by Microsoft, gets their hands on those patents?

One final scary thought.   Sun’s current market cap: $2.40 billion USD.  Sun’s cash on hand: $2.63 billion USD.   Microsoft’s current cash on hand: $19.71 billion USD.   I can just imagine Steve Ballmer saying, “Chris, take it out of petty cash.  I have an itsy-bitsy little acquistion I want to make….  Now I can embrace and extend Java all I want!  And you know those term-limited, non-Open Source TCK licenses Sun gave to OpenJDK developers — not any more!  They’re gone, within a year, the next time Red Hat needs to get the license renewed!”

Could it happen?   What do you think?

28 thoughts on “Is the Linux community watching a setting Sun?

  1. I thought this was a pretty good blog regarding market valuation: http://happybobblog.blogspot.com/2008/11/market-cap-what-it-means.html

    We have to hope that the people holding Sun shares aren’t willing to let them go for the current asking price. That makes sense, of course; if I buy 100 shares of Sun @ $20/share, I’m going to hold on to those shares until the price reaches $30. If it dips down to $2, I’m certainly not going to let them go for $2 unless I think Sun is on the verge of bankruptcy (or I’m panicking due to other market concerns, or I really really need the money).

    I own stock whose market value is half of what I paid for it, but I’m in it for the long haul. In theory, a solid company will come back.

  2. Don’t forget Sun also has $US1.26 billion in debt, meaning it’s not quite worth buying out for the cash yet.

    I doubt Microsoft would buy Java, except perhaps to kill it. Ditto OpenOffice, although I bet the DoJ would have something to say about that.

  3. I like living in my little fantasyland, and you go and destroy it.

    President Obama wouldn’t let that happen! (just kidding, but it’s still fun to say “President Obama”)

    How much do you think Schwartz could auction his ponytail off for?

  4. I am by far the least qualified person to talk about patents, but I think even making those kinds of speculations is spreading a bit of FUD. Leaving it at your concerns for their large patent portfolio might have been better. :) Anyway if the worst did happen, and the sky fell…FOSS would roll with the punches and come out in the end anyway. Another obstacle for another day is what I have to say.

    g’day

  5. @2: “Don’t forget Sun also has $US1.26 billion in debt, meaning it’s not quite worth buying out for the cash yet.”

    Well, if you want to do the full analysis, you have to look at their balance sheet. Hmm…. They have (as of the end of September) a $7.1 billion in current assets (cash, plus net receivables, short term investments, etc.). Add to that half a billion in long-term investments, and $1.6 billion in real estate (although who knows what’s that’s really worth given the current market), and some other bits and pieces, and the total assets including $1.7 billion of goodwill is $11.9 billion.

    On the liability side, they have $5.8 billion in short-term liabilities, another $0.7 billion in long-term debt, and another $1.6 billion in “Other liabilities” and “deferred long-term liability charges”, and so on. If you some the total assets, net liabilities, and take out the “goodwill” (since that would disappear in a liquidation scenario) we end up with a number which is roughly $2 billion. So still smaller than its current market cap, although probably not when Sun hit lows of $2.60/share.

    Andres is right though, that in an tender offer situation the corporate raider would probably have to offer a premium over the current stock price in order to be sure of getting a controlling interest in the company (which is what you’d need before you start liquidating). So that, plus the fact that in this market, most corporate raiders probably couldn’t get the credit they need to finance such a deal, is probably what is saving Sun (that lock-up of the credit market had to be good for something! :-) . Still, it would be well within the capabilities of company like Microsoft which has plenty of money in its warchest. I suspect the main reason why MSFT might not do it is they might not want the distraction.

  6. I always wonder how good their sales people are. A few years ago I was with some Sun salespeople doing a joint pitch of lots of their hardware, lots of their software and some of our software. The only thing the Sun salespeople seemed to be good at was gigahertz. If you wanted some gigahertz they could slice and dice it all ways and have a quote in your hands quickly. As to the features and benefits of their software, that was a 20 second explanation followed by mentioning how many gigahertz you would need!

  7. Don’t forget OpenOffice. Sun still employes the StarDivision guys and has a pretty major role in that project.

  8. Dude, you almost make it sound like a shame its a hypothetical situation. Imagine ridding the world of Java and Gnome, w00t, what’s next, world peace? :-)

  9. What is the interest of Microsoft shareholders in this? How would such an investment give a return better than alternatives? If such a course of action is really the best deal for the cash of Microsoft, which is the property of the shareholders, not Steve Ballmer, then we are all in big trouble.

  10. @bryan
    I agree, I think Sun’s product lineup would fit nicely in with IBM. Surely much better than some of Big Blue’s other purchases like Sequent or the laundry list of software houses that I can’t even think of to associate with IBM.

    Sun would give IBM considerable software might in the form of Java (which IBM has been a firm believer in with WebSphere product line and system z java) as well as additional Open Source credibility with OpenJDK and MySQL.

    Sun’s hardware – UNIX servers and storage – would fit right in with IBM’s product line. Solaris is the only thing that would find itself in a strange position.

    Just some food for thought.

  11. Apple is another company that could highly benefit from Sun’s enterprise credibility since they basically have none. In fact, a marriage between these two companies seems like destiny.

  12. @11 Kevin,

    First of all, a disclaimer — these decisions get made far above my pay grade. That being said, are you kidding?!? Take a look at Sun’s Enterprise software line! Even though Sun invented Java, and invented the concept of the Java Application Server, if you ask people who the top two commercial J2EE appservers, they would probably respond Websphere and Weblogic. Sun has been valiantly trying to make money with their commercial application server, and at best is running a distant third. Take a look at Sun’s (non-OS, non-OSS) software lineup, and point out a single product which is a category leader. Can you think of one besides possibly their Java run-time? And IBM has its own, which in my opinion is faster and far more potential than Sun’s. (I may be biased, given that I worked with the team that created IBM’s real-time Java with a real-time garbage collector.)

    On the storage side, IBM already has a very strong storage lineup; how would adding any of Sun’s StorageTek products be at all helpful? And on the server side, IBM’s Power architecture is arguably in a far better position than Sun’s aging SPARC architecture, and Sun’s x86 business is low, low margin (like all x86 servers; there’s not much money to be made there anymore, which Dell is learning to its sorrow.)

    To quote from a recent article in Forbes magazine:

    When Sun Microsystems named its latest data storage product “Fugu,” after the poisonous blowfish served as a delicacy in Japan, it may have dropped an accidental hint about the company’s current role in the tech food chain.

    Even as the struggling server vendor’s total market value fell further to end below $3 billion on Wednesday, analysts say a buyout of Sun remains unlikely: The company has become so toxic that no one dares to swallow it.

    Sun’s interdependent software, services and hardware business offer little upside to potential acquirers like IBM or Hewlett-Packard, both of whom have been stealing the company’s customers even without Sun’s assets, says Frank Gillett, an analyst with Forrester Research. And the current credit environment makes a risky cash bet on a shrinking company less attractive than ever.

    Given the above analysis by Andy Greenberg and Rebecca Buckman, I think the much more likely scenario if Sun gets acquired in a hostile takeover would be by a corporate raider interested in breaking up the company for its parts, and what might happen to various pieces that are become much more important to the OSS world — including Open Office, which I failed to mention in the original blog posting (good point, colin), Open JDK, MySQL, and their patent portfolio. The open source pieces will probably survive just fine, although it will suck for the employees involved. However, the Java TCK is highly proprietary, as of course is Sun’s patent portfolio. That’s where the real danger lies, IMHO.

  13. IBM could be interested not for any product but for the few reliable customers. Namely telcos and cell phone folks. Buy Sun then send notice of a transition plan to Power or x86 processors using IBM’s rack/blade system. It could be a huge boon to the low-power Power side. And IBM has a long track record of making bad decisions about networking, so this would fit right in. Plus IBM would get the storage (and other) patents.

  14. When Sun bought MySQL, my reaction was relief: “If Oracle had got their hands on MySQL … well, it doesn’t bear thinking about”.

    Sun is an order of magnitude bigger and more important than MySQL.

  15. Controlling interest in Java by patent, trademark and copyright as well as being the de facto implementation has to be worth at least $1 billion to a company like IBM or HP — probably several times that but it is hard to place a value on such things for customers and stockholders.

    The MySQL buyout at that price ($1bn) seems silly to me – an amateurish database that is struggling under its own success (http://monty-says.blogspot.com/2008/11/oops-we-did-it-again-mysql-51-released.html), but to Sun it probably made sense as Oracle entered the operating system field. It isn’t always about technology or similar markets.

    Continuing with Java, the IBM JRE might be excellent, but at the end of the day how many people use it? Where’s Java 1.6 or 1.7 support? As you can see, Sun still calls the shots here. The only time IBM is good at marketing software is when it is part of a solution, yet here Sun has a piece of software on around 90% of desktops (Source: http://www.sun.com/aboutsun/media/presskits/javaone2008/index.jsp#stats). If nothing else, it is excellent and almost free branding.

    Honestly, everything else is pudding on the pie at that point. Clearly there would be some casualties in the buyout – both personal and technology. This is true of any merging of companies. Yes, Sparc is a joke compared to POWER6+ but the customers are not. Converting current Sun customers to IBM or HP customers in one fell swoop is nothing to scoff at – you said so yourself, this hardware is lucrative business, not low margin x86 – and these are customers that like to buy software, maintenance, and services as well.

    Sun’s combined patent portfolio is nothing to joke about and the thought of this joining IBM’s is downright frightening.

    My point is, Sun is still a relevant and valuable company to other real companies despite what the Forbes suits say, and could probably be picked up for a steal in this economy.

  16. I hope Sun and Apple destroy Linux. The fundamentally communist concept of “open sores” cost me my job, and I will never forgive them for that.

  17. re: formersunemplyee,
    Suck less at your job and this wouldn’t be a problem. Go cry on some union worker forum where people might care.

  18. @17: “The only time IBM is good at marketing software is when it is part of a solution, yet here Sun has a piece of software on around 90% of desktops. If nothing else, it is excellent and almost free branding.”

    I’d put it a different way: the only time IBM chooses to exert itself in selling or marketing software is when it can make $$$ on it. OK, Sun has a piece of sofwtare, the Windows JRE, on around 90% of the desktop. Great. What, exactly, is that worth? How can they monetize it? Free branding? OK, a whole bunch of soccer moms might see “Sun” and the steaming coffee cup logo for a few seconds each time the JRE fires up. Are they going to making the purchasing decision on some expensive piece of Sun gear? OK, suppose the same JRE splash screen also shows up on a CIO’s desktop whenever s/he fires up some Java program or applet. How much effect will that have on whether that CIO will choose to buy Sun Storage or Sun Servers?

    Sun has been shipping Java on the Desktop for years; surely if it’s such a great brand success, their top line sales revenue must be growing every quarter… no wait… it isn’t. Oops.

    One of the reasons why I have a lot of respect for IBM is that it doesn’t spend a huge amount of time crowing about the great technology that it has contributed into OSS and Linux. The CEO of IBM doesn’t have a blog crowing about all of the great technologies IBM has implemented and then donated to the OSS/Linux community. However, IBM does issue joint press releases with its customers when some of its technology (some of which is proprietary, such as the real-time JRE, and some of which was open source and donated to the community, such as the work we did testing and making production-ready the real-time Linux technology) is useful for solving a real-world customer problem — because maybe other customers will decide that a company that delivers solutions for them is more interesting than a company where the CEO blogs about what great technology that company has.

    Great technology, if it is part of a solution that a customer is delighted to pay money to acquire because it will that customer to save even more money or make even more money, helps drive a company’s bottom line.

    Great technology that is not part of a solution and $3.50 will buy you a cup of expensive coffee at Starbuck’s.

  19. @17: “Converting current Sun customers to IBM or HP customers in one fell swoop is nothing to scoff at”

    Unfortunately, customers of a company which is bought out aren’t guaranteed to stay with the acquiring company. They may very well make the decision to rebid their contracts, and look at other alternatives once their previous supplier (whether it was Digital, Compaq, Sequent, Data General, etc.) is acquired, and there’s no guarantee they will pick the company that acquired their current supplier of their computing needs.

    And if it is true (as the Forbes article claims) that HP and IBM are having no problems convincing customers to switch to their respective companies without having to buy Sun, maybe it’s not worth it to go through the acquisition exercise. In practice, so many “big name” computer acquisitions (HP’s acquistion of Apollo, Compaq’s acquisition of Digital, Sun’s acquisition of Cobalt Networks, Red Hat’s acquisition of JBOSS, and many, many others) have just not worked out. Often the employees end up walking; customers decide that it’s time to go elsewhere, and in the end the synergies often don’t work out and it becomes a huge distraction for the acquiring company.

    In some ways I was disappointed that Microsoft didn’t buy Yahoo. Some friends I know there would have been able to collect on their golden parachutes, and would have made a killing, and it would have been a massive cash drain and massive distraction for Microsoft for at least a year or two, maybe more.

  20. Feeling the current flow of things, my instinct tells me that Sun will stay Sun. But if as you suggest, that it is a prime target for some nefarious investment firm or troll a la SCO, I say that is just the more reason for a suitor such as Oracle, IBM, Redhat (BigJava+BigLinux vested interest) to gobble it up for their own protection.

    Lets consider the corollary (sorry for the pun.. funny if anyone is familiar with the Intel acquisition of that namesake) that a BigJava house (Oracle, IBM, even Redhat) get a hold of Java as I describe above. If consumer branding is so irrelevant, why did IBM see it fit to sponsor the Olympics, tennis matches, golf tournaments (many of these have ended but usually because of greedy organizers)? IBM was a household name because for all intensive purposes they gave us commercial and later personal computing. This brand is quickly fading. People in my generation hardly know of the company anymore, much less what they do other than “computers”, which is false these days for what most think when they say “computers”. The Java brand and market is a big deal. This isn’t negated just because Sun poorly manages and executes it (as you said, their business people are questionable). Anyways, too much marketing crap – the Java brand is just once piece of what make Java and Sun lucrative to a whole host of companies if they are to be bought out.

  21. Very disturbing. The threat from a patent troll seems real, hence the importance of sorting out the software patents mess once and for all. One further thought, what happens to OpenOffice.org should Sun be acquired by some other company? I raised this question elsewhere and all I got was, “But OpenOffice is open source, so no problems.” Ironically, Linux does have a role to play in Sun’s decline.

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