The Time Was Right for a Change at Sun, McNealy Says

Scott McNealy, one of Sun's co-founders and the company's CEO for the past 22 years, was adamant last week that it was time for a change at the top -- and that it was his call to make the change.

"This was my decision that was supported by the board," McNealy told reporters during a conference call with new CEO Jonathan Schwartz last Monday. Sun's board of directors held a private conference call of its own late on the Friday before the change was announced, McNealy recounted, "and I said, 'Gang, it's time.' "

The end of McNealy's tenure as CEO comes under less-than-ideal circumstances -- Sun has either lost money or been barely profitable since 2001. But McNealy pointed to Sun's revenue growth for the quarter that ended March 26 as a sign that the company has turned the corner.

"I wasn't going to hand it over when the thing was deteriorating postbubble," McNealy said. "Now we've got it stabilized." He also said that Sun has "fixed" its product line through steps such as embracing Advanced Micro Devices Inc.'s Opteron processors for commodity systems and introducing its CoolThreads line of high-density, multithreaded servers.

McNealy gave Schwartz credit for many of the strategic changes that Sun has made over the past few years, such as open-sourcing Solaris and adopting a per-employee pricing model for the company's Java Enterprise System software.

Schwartz has "been calling a lot of the plays over the last couple of years," said Jonathan Eunice, an analyst at Illuminata Inc. in Nashua, N.H. "This is his architecture. This is his strategy that Sun is playing."

In addition, Schwartz has won praise for implementing layoffs that McNealy had avoided. "He has proven he can deal with tough situations managerially," said Laura Koetzle, an analyst at Forrester Research Inc.

But Ovum Ltd. analysts David Mitchell and Gary Barnett warned in a research note that Schwartz still "has a major task on his hands" at Sun. They said that "dramatic and painful changes" must be made, such as an overhaul of the company's software portfolio "that has to involve a good deal of divestment."

"Sun does not need 'more of the same,' or even 'a gentle touch on the wheel,' " Mitchell and Barnett wrote. "Sun needs to transform -- and the next few months will show whether Schwartz has the vision and the ability to take the hard road to recovery."

However, Schwartz indicated that he won't just be looking to make more cuts. "Are there acquisition opportunities out there? Absolutely," he said during the conference call. "We will be one of the consolidators in the open-source industry."

McNealy, 51, is getting a new job, too. He will be chairman of Sun Federal Inc., a unit that handles sales to the U.S. government, while also remaining chairman of Sun's board.

Copyright © 2006 IDG Communications, Inc.

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