Sun Microsystems to cut up to 6,000 workers

updated 6:21 p.m. ET Nov. 14, 2008

SAN FRANCISCO - The economic downturn might be pushing Sun Microsystems Inc., one of the storied names in computing, to the brink of extinction.

The company’s servers and software helped stimulate the Internet boom, and its engineering acumen is revered. But Sun never fully recovered from the previous financial crisis — the dot-com meltdown — and it has been steamrolled by big shifts in the way businesses buy their back-end computers.

Now Santa Clara, Calif.-based Sun plans to slash up to 6,000 jobs, or 18 percent of its global work force, as it scrambles to cut costs to offset a devastating slump in sales of its high-end servers. Sales of those machines fell 27 percent in the latest quarter as banks and other big customers went under or couldn’t get loans to buy the servers.

“These are hard but necessary changes,” Jonathan Schwartz, Sun’s chief executive, said in an interview Friday as he disclosed the cuts. They sent Sun shares up 4 cents, or 1 percent, to close at $4.12.

Sun also said its software chief, Rich Green, has resigned, as the company splits its software division into three new business groups.

One will handle Sun’s Java programming language — a key ingredient for many Web sites — and open-source database offerings. Open-source software is free software for which Sun sells support services. Another will be responsible for Sun’s Solaris operating system, which is used to run servers. The third will focus on developing programs for “cloud computing” services delivered over the Internet.

Sun’s extreme restructuring is what many investors were calling for. It follows three other rounds of big layoffs in the past three years in which nearly 7,000 jobs were axed. Analysts say it gives Sun breathing room to improve its margins and try to return to profitability.

It might not ultimately be enough, though, to preserve Sun as the company is currently structured if losses keep mounting, renewing speculation about a possible spinoff or sale. Fujitsu Ltd., Hewlett-Packard Co., IBM Corp. or Dell Inc. are all potential suitors.

“They still have strong cash on the balance sheet, and they’re still generating free cash flow, so they’re not dead yet, but the patient is definitely on the respirator,” said Rick Hanna, an equity analyst with Morningstar Inc. “I can’t imagine for a second the board would be satisfied with Sun’s current performance. ... What’s happening with Sun at this point is figuring out how to maximize what’s left.”

Sun says it is not planning any spinoff or sale. It argues the cuts are needed to keep Sun competitive in a depressed economy that has also trimmed the sails of far healthier Silicon Valley companies, including Intel Corp. and Cisco Systems Inc.

In particular, Schwartz said restructuring the software division will help Sun focus on areas where it has seen the most growth. Open-source software is in high demand because of tightened spending budgets, he said.

Sun’s challenge is to build up that side of the business enough to compensate for severe declines in sales of its most expensive and profitable servers. The strategy hasn’t paid off to investors’ satisfaction yet.

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