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| January 21, 2004 Are you better off today? We have some good news and some bad news. First, the good news - Sun's stock price has increased recently. Sun executives should be commended for the job they have done managing expectations. Now the bad news - Scott McNealy has not been removed from office. When we take a close look at the last financial report, we see that without the collapse of the US dollar, Sun's revenues would have fallen 6 per cent. The gross margin decreased to 41.8 percent from 43.3 percent a year ago. Is there light at the end of the tunnel? Perhaps, a more appropriate question would be "is McNealy even in the right tunnel?" Are there good signs that Sun will return to prosperity under the leadership (or lack thereof) of Scott McNealy? To borrow from Ronald Reagan, if you are a SUN stockholder, are you better off today than you were two years ago? The closing price on December 31, 2001 was $13.93. For the past few months, Sun has been caught in the maelstrom of bad press, resulting from the poor executive leadership. Two examples are the $291,000 in fines by the Department of Commerce for allegedly exporting computers to China and elsewhere for military purposes and the $1.05 revision of financial results. Sun is not well positioned to battle IBM, HP, Microsoft, and Dell. Sun has done very little to solve its major problems. The company is still not profitable. I think most stockholders would answer no. If you are a SUN employee or former employee, are you better off today than you were two years ago? 7000 employees have been terminated during the past two years. A class action lawsuit has been filed in California alleging that Sun Microsystems Inc. eliminated the jobs of thousands of American high-tech workers in order to replace them with younger, lower-paid engineers from India. Sun may have used its forced ranking system to discriminate against many “high performing” employees, who were over 40 years of age. Sun deceived employees about stock options. Employee morale is very low. I think most current and former employees would answer no. If you are a SUN customer, are you better off today than you were two years ago? Your service has deteriorated due to employee turnover, low employee morale, and severe cost cutting. Sun is losing many customers to its competitors. For example, Hewlett-Packard reported that it generated $75 million in revenue in 2003 with a program that encourages customers of Sun Microsystems to move to HP servers that run Linux. I think most customers would answer no. I wrote an open letter to the Board of Directors on January 2, 2004 (see Updates webpage) asking them to remove Scott McNealy. How can any of them say, truthfully and honestly, that McNealy should continue as CEO? I am hopeful they are not "in his pocket" and have the courage to make the best decision for Sun stockholders, employees, and customers. As long as McNealy is there, Sun is in a quagmire. Now is the time to make real the promises to the stockholders, employees, and customers. © 2004 All Rights Reserved February 4, 2004
Over the past few months, Scott McNealy has been saying, “the Sun is not about to set.” That statement makes one wonder, if he has been reading this website. Who has been saying the Sun is about to set? I have been saying "the Sun also sets." I guess I had better try to improve my understanding of what Scott is really saying. Recently, McNealy has sounded like a used car salesman often repeating, "did I mention we are cheaper than Dell?" His latest discourse is the new Java Desktop System. Scott, please help us understand how this product is going to be the salvation of Sun. Help us understand why Sun is selling “cheap” rather than value. Also, help us understand how selling “cheap” will improve Sun’s profit margin? The last time I checked, Sun was unprofitable. Oh, I hear what you are saying. If we sell cheap in great volume, we will increase revenue to infinity and the accountants won't be able to calculate the profit margin. Oh, I understand your disrelish for accountants and the SEC. This will drive them nuts. What a brilliant strategy! I know you are running late for a Mensa meeting. Will you see any of the members of the Board of Directors of General Electric there? Oh, I see. You don't want to be at meetings with them anymore. We remember when you were saying Sun was going to take the mainframe business from IBM. Has that happened? We also remember when you were saying Sun was going to rule the appliance server market? Three years after Sun paid $2 billion in stock for appliance server maker Cobalt Networks, Sun has killed off the Cobalt product line. Scott, what happened to the Cobalt product line? They were a very innovative company prior to being purchased by Sun. I almost forgot about Highground. It was introduced as the product, which "enables Sun to take a leadership role in the emerging storage resource management market." Did Sun take the low ground by throwing away $400 million on Highground? Oh, I understand the problem - our memories are just too long. Scott, why should we believe you now? Oh, so you say, if this does not work, just wait until next year. I know - the Chicago Cubs will win the World Series and Sun will have a product, which will put Microsoft out of business and you will become the richest person on the planet. And if we don't accomplish our goal, we will blame it on a customer, like the Cubs blamed it on a fan. Splendiferous! The approach has worked for 95 years for the Cubs. Now I better understand how you have been able to keep your position despite the many consecutive quarters of failure. Going back to GE, are you mentioned in Jack Welch's new book? Oh, I am sorry for the inappropriate question. I forgot the title of the book is Winning. The Board of Directors should nudge McNealy out. Then, he should consider getting into the ice cream business, where a “flavor of the month” strategy might work. © 2004 All Rights Reserved February 22, 2004
It was the philosopher George Santayana, who wrote the famous adage, "those who don't learn from history are doomed to repeat it." Phocylides is credited with the writing, “give no decision till both sides thou'st heard.” On the issue of “forced employee ranking”, Scott McNealy did not heed their wisdom. In December, 2001, Ford Motor Co. agreed to pay $10.5-million to settle two class-action lawsuits accusing the automaker of discriminating against older employees. The lawsuits claimed that Ford's employee evaluation system favored younger employees. Ford's performance evaluation system, put into place last year, was used to evaluate about 18,000 managers and supervisors, or about 5 percent of Ford's work force. Employees were graded A, B or C. Those receiving a C could lose bonuses and raises, and two consecutive Cs could mean dismissal. Initially, at least 10 percent of employees were to be graded C, but that was lowered to 5 percent before quotas were eliminated altogether in July, 2001. The plaintiffs claimed that before the grading program, they had received positive evaluations. But under the new system, they said, they got Cs while some women and minorities with less experience or inferior work records were rated higher. Based on feedback received by this writer, this is very similar to the “forced employee ranking” system that Sun implemented under Scott McNealy. Also, many older Sun employees experienced the same discrimination. Ford has admitted its mistake implementing the performance evaluation system. It is this reporter’s understanding that another possible class action lawsuit, in addition to the H1B lawsuit, looms on the Sun horizon. In both cases, the legal issue is age discrimination. Why has Scott McNealy still not learned the history lessons of the consequences of discrimination? Why did he not investigate the other side of the issue before implementing “forced employee ranking?” How much will this major faux pas cost Sun stockholders? Why did this happen? Perhaps, he has been so focused on the Microsoft lawsuit that issues like discrimination never got on his radar screen. © 2004 All Rights Reserved March 9, 2004
Let's take a look at the current montage of Sun Microsystems. In the middle, there is a picture showing Sun products being squeezed out of the market by IBM, HP, and Dell. In a corner, there is picture of a Sun executive violating US export laws. In another corner, there is a picture of employees and former employees, bloodied by Sun's disasterous Human Resources programs. In another corner, there is a picture of Sun customers racing to the competition. In another corner, there is a picture of Sun executives jumping off a sinking ship. And superimposed flashing in and out, there is a picture of stockholders holding their noses. This is an ugly pictorial. On March 9, 2004, Banc of America Securities overnight cut its rating on Sun Microsystems to neutral from buy. "We have renewed concerns about the long-term stability of Sun's core Unix business," the broker said. "We had previously assumed that Sun's core business would be stable in 2004. Given the weak relative performance by Sun in the current quarter, we can no longer support the thesis that Sun can hold share in storage or UNIX and gain share in the Linux market on a longer- term basis." On March 5, 2004, Standard & Poor's cut Sun Microsystems Inc.'s debt ratings to junk, citing losses at the company and fierce competition in the server market. Last week, Gartner Dataquest reported that in terms of revenue IBM was first with $14.8 billion worth of servers in 2003; H-P was second with $12.5 billion in server revenue; Sun Microsystems was third with $5.5 billion; Dell was fourth with nearly $4 billion and Fujitsu Siemens was fifth with $2.6 billion. In terms of servers shipped, Gartner reported H-P was first with 1.6 million units in 2003; Dell was second in shipments with 1.1 million units; IBM was third with more than 878,000 servers shipped; Sun was fourth with 288,000 units; and Fujitsu Siemens was fifth with 119,500 shipments. On February 25, 2004, Sun Microsystems announced that Pat Sueltz, head of the company's computer services business, was leaving Sun to join Salesforce.com Inc. This writer questions Sueltz’s the timing and the announced reason for her sudden departure. In an article titled Sun On The Run, Daniel Lyons named several Sun customers, who are switching from Sun servers to competitive servers running Linux. The article indicated Sun was not making an effort to retain these customers. Does this mean McNealy thinks it is easier and cheaper to get new customers than retain old customers? McNealy flushed Sun assets and research and development money down the toilet with the purchase of Cobalt and Highground. His “forced employee ranking” and H1B hiring programs have been cataclysmic. The Department of Commerce announced on December 15, 2003 that Sun Microsystems and its subsidiaries must pay $291,000 in fines for allegedly exporting computers to China and elsewhere for military purposes. It is very difficult for a reasonable person to understand why the members of the Sun Board of Directors fail to see this frightening collage and fail to replace McNealy. Are they asleep at the switch? © 2004 All Rights Reserved April 6, 2004
After the announcement of the Sun settlement with Microsoft, this editor has received communiqués from some readers questioning whether this website will sunset. They cite the nobility of the goal, but they are skeptical about chances of its attainment. Let me help you understand why the website will not sunset and the goal is achievable. On the surface, the Microsoft settlement appears to be great news for Sun stockholders. The key will be how well McNealy uses the money. History does not speak well for McNealy's ability to turn this asset into revenue and profits. Remember Cobalt and Highground. How does the settlement help Sun better compete against IBM, HP, and Dell? Will the money be used to research and develop new products in order to get in new market segments, where Sun can better compete? Will he use it to pay for downsizing? Again, history does speak well of his success with downsizing. To borrow from McBeth, the Sun downsizing story has been "a tale told by an idiot, full of sound and fury, signifying nothing." The layoffs have achieved class action lawsuits, not profits. Futhermore, the third quarter, which ended March 28, 2004, will be unprofitable. And now Sun just announced another round of layoffs - 3,300 this time. Again, employees are paying for the poor decisions of the executive management. In his justification for not expensing the cost of stock options, McNealy recently said more than 87% of stock options go to employees, not to executives. How much solace can these employees and their families take in knowing they have worthless stock options? Does he consider the layoffs just a minor issue compared to selling computers to our enemies? Has he ever apologized to the American people for that transgression? Does he care? Why did McNealy agree to be the featured speaker at the January 2000 Enron conference for stock analysts? Has he ever offered a public explanation or is he just waiting for the Skilling trial? Will these new layoffs be handled in manner to cause more class action lawsuits? In addition to layoffs, Sun is downsizing by outsourcing. Sun is trying to tell employees that outsourcing is not bad for them. Do not trust what you are told. Get promises in writing. Contact an attorney. Make your attorney aware of this website. This editor urges any employee impacted by a layoff or outsourcing, who feels he/she is being treated unfairly or unlawfully by Sun, to contact the Webmaster at this website. One must ask "what impact will the new layoffs and outsourcing have on employee morale, customer satisfaction, and customer loyalty?" This downsizing action will impact the morale of all employees. These employees will then provide poor customer service. Sun will then lose more customers to competition. Sun will have to downsize again. This has been the history. What will be different this time? At first glance appointing a new President and Chief Operating Officer appeared to be a good move in the right direction, considering the maladroit performance of McNealy. But, when one takes a closer look at Jonathan Schwartz; one might think that he got the job because he will be McNealy's puppet - a "yes" man, who when told to jump, will simply say "how high." Schwartz appears to be a software person. Is Sun a hardware or software company? What percentage of Sun's revenues come from software? Is McNealy's new vision to make Sun a software company? Why did McNealy not hire someone outside the company? Did he try and was turned down? Was the hiring of Schwartz in the best interest of Sun's stockholders or in the best interest of McNealy? And so, this editor assures the Sun stockholders and employees that this website will continue to publish information that will help remove McNealy as CEO and replace him with a trustworthy leader, who can make Sun consistently rise again. The number of readers and the number of tips sent to state and government agencies for investigation are increasing. © 2004 All Rights Reserved June 19, 2004
If there is truth in the old adage, "imitation is the sincerest form of flattery", then Digital Equipment Corporation (DEC) should be delighted with its impersonation by Sun. But, Sun stockholders, employees, customers, and partners see no virtue in continuing in the direction that led to the demise of DEC. DEC was founded in 1957 by Ken Olsen, an engineer, and Harlan Anderson, a colleague from his MIT days. By 1961 the company was profitable and started construction of its first computer, the PDP-1. Through the 1960s, DEC produced a series of machines with a better price/performance than IBM's mainframe computers. Despite the fact that Olsen avoided marketing, believing that well- engineered products would sell themselves, DEC achieved tremendous growth. By 1988, the company had grown to be IBM's biggest competitor by building high-quality hardware and leaving software development mainly to the research community and its commercial spin-offs. DEC grew to approximately $14 billion and 135,000 employees. After multiple layoffs, by the time of its sale to Compaq the company had downsized to approximately $8 billion and 45000 employees. In October 1994, the stock dropped from above $100 to $30. The stock never got above $30 again until the sale to Compaq on January 26, 1998. Sun was founded in 1982 and grew to approximately $18 billion and 43,000 employees. Sun's tremendous growth in the late 1990s was fueled by the dot-coms. Sun’s stock reached a high of $64 in September 2000, and is now slightly above $4. One might say this is an interesting history lesson, but might wonder how is Sun imitating DEC? First, it starts with the CEOs. Both were entrepreneurs, not leaders. Although at opposite ends of the personality spectrum, both were company founders, who used a Theory X management style. This is exemplified by keeping most of the power and authority. In that culture, key things that need to be discussed are “kept off the table.” Second, the Boards of Directors of both companies were controlled by insiders, who did not challenge the CEO. Loyalty was the top requirement to be a Board member. An independent Board would have dismissed McNealy a long time ago. Third, both companies experienced tremendous growth during times of little competition. This led to a feeling of invincibility, which caused both companies to fail to act effectively in dealing with problems that were highly visible to everyone, both inside and outside the company. Fourth, at a time of major market changes and significant competition, both companies were not able to meet the challenge, because they had the wrong CEOs. The evolution of technology, organization, and culture intertwined into a technological and business environment in which both organizations were unable to cope. To reiterate a key point, the CEOs were entrepreneurs, not leaders. DEC responded to the acclimatization of the PC by large and mid-sized customers along with the strong competition from IBM, HP, Dell, and Compaq by denying that the changes were real and using a "strategy of the week" approach. These included: - Commit to open foundation - De-commit to open foundation - Commit to PC's, but with proprietary OS, then de-commit, recommit - Offer services - No services Sun responded to the acceptance of Linux in the marketplace, the momentum toward open systems, and the strong competition from IBM, HP, and Dell, by initially denying that the changes were real and using a "strategy of the week" approach. These included: - Fight Linux - Commit to Linux - Commit to open systems - No open systems - Deny Dell is a competitor - “Cheaper than Dell” marketing strategy - Subscription models gimmick In 1992, DEC replaced Olsen with Robert Palmer. Palmer neglected DEC’s customers and turned his attention to the financial community. He developed and implemented plans to reduce costs. This resulted in a vicious cycle of asset sales, layoffs, revenue decreases, more asset sales, more layoffs, more revenue decreases and finally the sale of the company. Palmer brought in Crawford Beveridge to manage the HR function. This writer was told that Beveridge changed company culture from one of respecting employees to one of treating employees as property and pitting one against another, significantly hurting the morale of employees and their commitment to the company. McNealy neglected Sun’s customers and turned his attention to the financial community. McNealy wanted to show the financial community that he could return Sun to being profitable by cutting costs. McNealy was futher distracted from Sun's customers by his abhorrence of Bill Gates and Microsoft. This has resulted in a vicious cycle of asset sales, layoffs, revenue decreases, more asset sales, more layoffs, and more revenue decreases. In 2000, Crawford Beveridge returned Sun to manage its HR function and lead its downsizing efforts. He implemented forced ranking and layoffs, which had the same consequences as what happened to employee morale at DEC. Like Palmer, McNealy failed to understand the importance of high employee morale and its significance to good customer service and customer loyalty. When asked whether he's more of an entrepreneur or executive, McNealy said, "What's the difference? I am a proud and motivated capitalist." That response speaks volumes in explaining why Sun is last on Barron's list. At this juncture in Sun's history, it needs a lot more than “a proud and motivated capitalist.” So, the question is “could Sun become another DEC?” Absolutely, there is no doubt about it. However, the more important question is “will Sun become another DEC?” That is still an open question. The answer depends on whether the company replaces McNealy with a transforming leader, who has the right vision and a strategy to achieve that vision before it is too late. Reflecting on DEC, it was too late when Olsen was forced out. But, even if it had not been, Palmer was not the transitional leader DEC needed. © 2004 All Rights Reserved October 11, 2004
I recently wrote Scott McNealy and asked the following questions. 1. Did Sun deceive investors when it published its 2004 fiscal fourth quarter earnings report? 2. Considering the fact that Sun has a former SEC employee on the audit committee of its board, why did this restatement of earnings happen? 3. Is Sun using the practice of earnings restatements as a tool to deceive investors? Irma Villarreal called me in response to my letter to Scott McNealy. She said she is the person, who prepares Sun's submissions to the SEC. She would not answer my questions in writing as I requested. She claimed that Sun never announced a $1.05B restatement of its 2003 fiscal fourth quarter results. I later sent her a Forbes article about the restatement. She did not respond. She said Sun had already answered these questions for media - WSJ, Forbes, Businessweek, etc. She said they were satisfied with Sun's answers. I said I know the media never asked these questions. She said Sun is in compliance with Sarbanes-Oxley. She never denied that Sun deceived investors. I sent Ms. Villarreal my notes from the aforementioned conversation for her review and correction. She has never responded. Why would Ms. Villarreal be willing to talk to me about the questions that I raised, but would not put her answers in writing? Why did Ms. Villarreal lie about the $1.05B restatement of Sun’s 2003 fiscal fourth quarter results? Why did she not respond when I sent her a copy of the article about the restatement? I have checked with the media to see if any of them have asked Sun those questions. None of the media has confirmed asking Sun any of those questions. Why did she lie about the media asking and receiving answers to those questions? Why did she not deny that Sun had deceived investors? This writer believes that Scott McNealy directed Ms. Villarreal to contact me to try to convince me that Sun had not deceived investors, but told her not to respond to any questions in writing. He also told her not to admit to anything, including the obvious such as the $1.05B restatement. After she was caught in these mendacities, McNealy told her not to respond, verbally or in writing, to any question or statements. If asked those questions under oath, how would Ms. Villarreal respond? How would Scott McNealy respond? If Sun has never deceived it investors, why did Ms. Villarreal handle our telephone conversation and my subsequent inquiries the way she did? Is it probable that Sun deceived its investors? June 9, 2006
This writer started this website on September 1, 2003, with a mission of removing Scott McNealy as CEO of SUN Microsystems. With the help of many of my readers, this goal was accomplished on April 21, 2006. One reader asked, “…having achieved your goal against all odds , why don’t you just declare victory, close your website, and end your other activities related to SUN?” My answer is to do so would leave SUN continuing in the same direction. To quote Shakespeare, “The fault, dear Brutus, lies not in the stars but in ourselves.” We cannot allow McNealy to continue his failed policies and practices by letting him use his hand-picked puppet on a string continue to lead SUN Microsystems.. Let’s take a look at one of last week’s major announcement. The company announced plans to cut 4,000 to 5,000 jobs over the next six months. Is this like déjà vu all over again? Haven’t we have seen this McNealy production before? What benefits did Sun stockholders, employees, and customers gain from the layoffs and outsourcing of the past? Will the plot feature forced ranking of employees or some other unfair method of cutting employees? Will the set be decorated with many employee lawsuits? Will the customers be bit players in the background, severely hurt by thousands of disgruntled employees, who are providing poor customer service? Will the investors be deceived again? So far, the investors seem skeptical of this production. The board of directors voted to eliminate the poison pill plan. On the surface, this was a very good announcement. It was long overdue. McNealy and his cronies had used the poison pill, not in the best interest of the shareholders, but as a tool to protect their own interests. McNealy has been one of the worse CEOs of a major company in the twenty first century. His alleged deceit of shareholders has cost them and their families money planned for their retirement and children’s education. An example of the alleged deceit is SUN’s restatement of its quarterly earnings statement. He has deceived employees by trying to sell employee stock options. McNealy has received an average annual compensation of $13.3 million over the past six years while the annual rate of return of the company over the same period was -31.5%. How many of the employees terminated over the past six years as the result of lay offs were paid employee bonuses? So, what will be McNealy’s legacy? In large part due to the documentation provided by this writer and this website, history will not be kind to McNealy, nor should it be. McNealy stayed too long as CEO. He also stayed too long as COO. His stay on the GE board was very short. McNealy is about the patina of the Silicon Valley, slowly aging but not keeping up with the times. He remained stuck in a time warp of the “dot-com” days. His fixation on Bill Gates was one of his major flaws? Let me set the record straight. Scott, you are no Bill Gates! For the past six years, McNealy was less than candid with SUN shareholders, SUN employees, and SUN customers. McNealy surrounded himself with people, who were completely loyal to him, and told him what he wanted to hear, and not what he needed to hear. McNealy hand picked a board that served in his best interest, not in the best interest of the stockholders. McNealy treated employees like pawns in his personal chess game, not like the keys to quality products and services and high customer satisfaction that they were. McNealy is not a visionary, although he wanted people to think he was. McNealy never had a workable strategy, although he wanted investors to think he did. McNealy is not a leader. Without former COO, Ed Zander, he floundered. McNealy has not demonstrated the business ethics required to create the corporate culture that the company needed. SUN lacked the fundamental basic beliefs to provide the solid foundation for the executives, managers, and employees. The SUN corporate culture was bankrupt. An example of this was the fact that some managers and executives, knowingly, reported incorrect quality information. McNealy seemed to condone this "cook the books" activity, because he did not take any actions when it was brought to his attention. McNealy is an accountant type, although he wanted the SEC to think he is not. Speaking of the SEC, another flaw is McNealy’s obsession with the SEC, as evidenced by his calling the them "wacko." He put Lynn Turner, a former SEC employee, on the SUN board in order get the information to outsmart the SEC and get around Sarbanes-Oxley. After a lot of scrutiny by this writer, in September, 2005, Turner suddenly and surprisingly quit the SUN board. Another McNealy imperfection was his idea that the stockholders would continually accept cash on the balance sheet in lieu of profits. McNealy is a more skilled hockey player and golfer than a leader and CEO. His story is one of the worse business tragedies of our times. But, the worse tragedy is the thousands of people, who have been significantly hurt financially by Scott McNealy. That will be the ultimate legacy of Scott McNealy. © 2006 All Rights Reserved |
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