Sun Micro founder McNealy steps down as CEO

By Duncan Martell

SAN FRANCISCO - Scott McNealy, the pugnacious chief executive of legendary Silicon Valley computer maker Sun Microsystems Inc. on Monday handed the reins to protege Jonathan Schwartz as the company seeks to forge a turnaround.

Shares of Sun rose nearly 9 per cent to $5.42 after the company announced McNealy, 51, would step aside as CEO but remain chairman of the company. Rumors of the transition had circulated for years but intensified in recent months.

McNealy's 24-year role in charge of Sun ends immediately and coincided with a quarterly report that Schwartz called "an inflection point" in Sun's turnaround, despite a net loss.

Famous for quips, such as calling Microsoft's email program "Lookout," a pun on the Microsoft Outlook name and a reference to the number of viruses successfully targeting it, McNealy turned Sun into a major force in high-end computing as well as more recently offering smaller machines for simpler tasks.

In the 1990s, his attacks on Microsoft and its chairman, Bill Gates, became relentless, calling Microsoft Windows software a "giant hairball" and contrasted it to Sun's efforts to work more openly with other industry competitors.

Shares of Sun -- a powerhouse during the dot-com heyday -- have languished in recent years, and McNealy, who fought an epic battle against Microsoft Corp., was sometimes blamed.

Analysts calling for cuts of up to 20 per cent of Sun's 38,000-strong workforce said he was reluctant to swing the ax. Sun's shares are down more than 90 percent from their high of $64 in 2000.

In an interview, McNealy suggested his role as chairman would be typically and characteristically untraditional.

"Think of it more as a founder's role than a chairman's role," McNealy said. "I'm the lead door opener."

While McNealy's years of leadership drew wide praise from analysts and investors, some called the move overdue.

"Finally," said John Jones, a retired Wall Street analyst who once followed Sun. "I don't think (McNealy) was reading the tea leaves accurately enough to allow his business to grow in this new decade. ... The first 18 years were stellar."

Schwartz, 40, joined Sun in 1996 and will retain his position as president.

McNealy said he was making room for Schwartz and other senior Sun executives, who now are setting annual strategy and spending plans for the next fiscal year starting in July.

"We had a late Friday night board call and I said, 'Gang, it's time,'" McNealy said. "It was my call."

News of McNealy's departure came after Sun posted a quarterly net loss of $217 million, or 6 cents per share, compared with a year-ago loss of $28 million. Revenue climbed 21 per cent, helped by last year's acquisition of Storage Technology Corp.

Excluding items, Sun had a loss of 1 cent a share, topping the average analyst estimate for a loss of 3 cents per share.

Sun said that its U.S. server and storage business rose 35 per cent from a year ago, and, excluding StorageTek and another, small acquisition, it climbed 12 per cent.

Sun CFO Michael Lehman said it was the first time in two years the company had delivered year-over-year growth, excluding StorageTek. "We do not believe this will be a one-time occurrence," he said on a conference call.

Sun developed the Java programming language and platform, which can unite various operating systems and is used on everything from mobile phones to mainframe computers.

Still, the company, which still largely specializes in server computers that run corporate networks, has struggled to stay profitable since the implosion of the dot-com and telecommunications boom in 2001.

"(His departure) is an appropriate example of the new corporate governance since the stock has languished for so long," said Robert Robbins, president of Robbins Capital Management in Atlanta.

McNealy is unlikely to remain inactive, an analyst said.

"Scott does leave a really strong legacy. He's still very much involved in setting of strategy of the company moving forward," said Matt Eastwood, a server analyst at research firm IDC.

Schwartz regularly touts the environmental friendliness of its servers compared to rivals's due to their lower power consumption. He also said in the interview he will continue the external Web log, or blog, he has been writing for some time.

Schwartz, a Democrat, and McNealy, a Republican, said they work well together and "finish each other's sentences" and that Schwartz is now ready to take the lead.

Asked if Schwartz's push to sell the eco-friendliness of Sun's servers had turned McNealy into an environmentalist, the exiting CEO responded with a characteristic quip: "Peace, bro."

(Additional reporting by Chris Sanders in New York and Eric Auchard and Scott Hillis in San Francisco)