Sun, Microsoft make peace! battle Linux

Duncan Martell

SAN FRANCISCO: Computer industry titans Sun Microsystems and Microsoft settled their bitter antitrust battles, letting the former rivals form a common front against the increasingly popular Linux operating system.

Microsoft agreed to pay $2 billion to Sun, helping ease the financial pain of 11 straight quarters of declining revenues for the maker of fast computer networks and Internet software.

Sun, based in Silicon Valley's Santa Clara, California, also said it would cut its work force by 10 percent and named Jonathan Schwartz, 38, president and chief operating officer.

The two moves seemed to please investors and Wall Street analysts. Sun shares climbed 20 percent on Nasdaq to end at $5.06 a share, up 87 cents.

Both companies face stiff competition from upstart Linux in the market for server software used on networked computers because Linux can be copied and modified freely.

"Sun and Microsoft have a common enemy: Linux," said Rob Enderle, principal analyst at Enderle Group in San Jose, California. "They are seeing each other as less of a threat and, together, facing a common threat."

The settlement appears to resolve the bitter rivalry between Sun Chief Executive Scott McNealy and Microsoft Chairman, Bill Gates, and give customers who were thinking of moving to Linux a reason to stay with Sun and Microsoft, analysts said.

"It increases the probability of Sun's success but doesn't guarantee it," said Henry Asher, president of New York-based money management firm Northstar Group.

For the world's No. 1 PC software maker Microsoft, the deal may help free up its $53 billion cash pile for acquisitions, a stock dividend, or other uses because Microsoft has long said it would retain cash while facing lawsuits. Microsoft CEO, Steve Ballmer told reporters, that he didn't think the company was clear of litigation yet.

PEACE IN OUR TIME

Under the 10-year pact, Sun's computer servers as well as its widely used Java software will work better with Microsoft Windows, addressing a key complaint of customers. Sun had filed an antitrust suit and sued Microsoft over the Java software.

Microsoft will pay $700 million to resolve antitrust issues and $900 million to settle patent problems. The two agreed to pay royalties for using each other's technology. Microsoft will make an initial payment of $350 million to Sun.

Sun's McNealy called the resolution a huge step forward. "Everywhere we go our customers say, 'We have both Sun technology and Microsoft technology -- we need peace,'" he said in a conference call.

Schwartz told Reuters in an interview that the pair would remain "assertive, creative competitors," but added, "Now, customers can assume that litigation will not be the principal form of that competition."

Sun only recently began taking Linux seriously. Sun's business is still largely based on its own proprietary microchips and a version of the Unix operating system, Solaris that competes with Linux.

While investors applauded the settlement and the 3,300 job cuts, Sun said it expects a quarterly loss to be wider than Wall Street had expected, excluding charges.

Sun said it expects a net loss for the third quarter ended March 28 of $750 million to $810 million, or 23 cents to 25 cents a share, on sales of $2.65 billion. The loss will include about $200 million in job and real estate restructuring costs.

Excluding one-time charges, Sun expects a loss of 6 cents to 8 cents a share. Analysts had been expecting a loss of 3 cents a share, according to Reuters Research, a unit of Reuters Group Plc. Analysts had forecast revenue of $2.83 billion.

The company said it expects to take a total charge of $475 million related to the restructuring. The move comes after being pressured by analysts and investors to cut more jobs to bring costs in line with lower revenue.

"Sun is being serious about getting its business model realigned," said Richard Chu, an analyst with Cowen & Co. "They certainly had to move on the restructuring front."

(Additional reporting by Eric Auchard and Caroline Humer in New York)

© Reuters