Sun employees hopeful as McNealy's CEO tenure ends

McNealy had been one of the longest-serving CEOs in the technology industry

Sun Microsystems Inc.'s Scott McNealy sounded sedate yesterday when he announced that after 22 years he was stepping down as CEO at the company he co-founded in 1982.

"This was my decision, that was supported by the board," McNealy said in the conference call at which he said he would be replaced by Jonathan Schwartz, formerly the company's president and chief operating officer, effective immediately. "We had a late Friday night board call and I said, 'Gang, it's time.'"

The leadership change is big for Sun. McNealy had been one of the longest-serving CEOs in the technology industry, and the end of his tenure comes under less-than-ideal circumstances -- the company has either lost money or been barely profitable since 2001, and its stock has been stagnant.

Changes in top management can have a chilling effect on company morale. McNealy's departure had been the subject of speculation within the company for several months, and despite the prospect of layoffs under the new CEO, some employees expressed enthusiasm over the move.

"Schwartz, to be honest, has been acting like a CEO for a year and a half now," said one employee who asked not to be identified. "Jonathan will be a better CEO than a COO.... This is a better clarification of roles."

"I love it," said a second employee, who also asked not to be named. "I think he'll extend what Scott has done with the company all these years. They are similar in many ways."

Schwartz, who came to Sun as part of its 1996 acquisition of software vendor Lighthouse Design, has been groomed for the CEO role for years, McNealy said. With many of Sun's strategic bets now on the table, the time had finally come to hand over the reins, he said.

Sun has indeed gone through some major changes over the past few years. It has settled a long-standing legal dispute with Microsoft Corp., reversed course and decided to release its Solaris operating system under an open-source license, handed over much of the development of its UltraSparc processors to Fujitsu Computer Systems Corp., embraced commodity systems based on Advanced Micro Devices Inc.'s microprocessors and bet on a whole new line of multithreaded servers called "CoolThreads."

"I wasn't going to hand it over when the thing was deteriorating post-bubble," McNealy said. "Now we've got it stabilized; we showed a wonderful growth quarter last quarter."

The timing of McNealy's decision came as a surprise to one analyst who follows the company closely. " I would have thought it would have been one to two more years out, but it kind of makes sense," said Gordon Haff, an analyst at Illuminata Inc. in Nashua, N.H. "What else could McNealy have accomplished before he left to really make a difference?"

McNealy gave Schwartz credit for many of the strategic changes, but the most important decisions ahead for Sun's new CEO will be operational. With Wall Street calling for the company to reduce its headcount, Schwartz said he will spend the next 60 days -- the final months of Sun's fiscal year -- engaging in a comprehensive review of all corporate resources.

"We're going to be making sure we're aligning the organization for growth," Schwartz said.

Within Sun, the expectation is that this realignment could result in a 10% to 15% reduction in the company's workforce of nearly 38,000 over the next year.

McNealy is not the first executive to step down as CEO after founding a major technology company. In recent years Microsoft Corp., Dell Inc., and Intel Corp. have all found new, high-profile, roles for their founders and chief executives.

McNealy may find himself even more frequently in the public eye, said the second Sun employee. "I think he'll be an extremely active chairman," he said.

McNealy will remain with the company, serving as chairman of Sun's board of directors and the head of Sun Federal, the business unit that sells to the U.S. Government. In his new full-time job, McNealy will be responsible for developing Sun's relationships with its government and academic customers and will also play a role in developing the company's key strategic partner relationships.

He also expects to work with Sun's international customers and partner relationships. "This is going to allow me to unfortunately spend a little more time on an airplane than I would like," he said.

Said the first employee, "Scott's going to be basically playing golf with the CEOs of our top customers."

Stephen Lawson and Shelley Solheim, of the IDG News Service, contributed to this story.

Copyright © 2006 IDG Communications, Inc.

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