Will Suns McNealy Stay or Go?

By Peter Galli  |  Posted 2006-04-18

Will Suns McNealy Stay or Go?

Will he stay or will he go?

Thats the million-dollar question about the future of Sun Microsystems CEO and co-founder Scott McNealy. Well, at least thats what the rumor machine would like us to believe.

Speculation about McNealys future at Sun is not new: Weve been there so many times before, and well most certainly be there again. It would be interesting to know how he was described in his class yearbook—"the most likely to be fired" would be the tag line detractors would now most like to see.

It must be tough for McNealy having the dubious honor of being the CEO most predicted to leave or be forced out of any modern-day high-tech firm, not just because of how it affects his ability to effectively run the company, but also because of the enormous impact the endless rumors must have on the thousands of Sun staff.

So why has the rumor mill reached fever pitch on this issue yet again? There are a few primary reasons for it.

Firstly, a number of Sun executives have left the company in recent months, including John Loiacono, Suns former executive vice president of software, who moved to a position as senior vice president of creative solutions at Adobe Systems after 20 years with Sun; Marge Breya, formerly Suns senior vice president of marketing in global sales operations, who went to BEA Systems; and Chief Competitive Officer Shahin Khan, who joined Azul Systems.

But, on the flip side, a number of former executives have also returned to Sun, including former Chief Financial Officer Michael Lehman, who came back from retirement as Suns CFO in February, and co-founder Andy Bechtolsheim, who now leads the design team for its Galaxy line of x86 servers.

Also back in the Sun fold are Tom Goguen, back from Apple, as vice president of operating system products; Karen Tagan-Padir, who moved back from Red Hat to lead the development of Suns Java server software; and Peder Ulander, who left Sun in 2004 for embedded Linux specialist MontaVista, but recently rejoined the firm as vice president of software marketing.

So that essentially undermines one of the theories being floated that Sun executives are fleeing a sinking ship.

To read more about Suns recent executive appointments, click here.

But one of the biggest questions fueling the speculation fervor is why someone like Lehman, who could become the CEO or CFO of just about any company, would come back out of retirement and off the Sun board to take exactly the same job he held before.

A former Sun executive who still has close links to the company told me that that question is what is driving most of the speculation within Sun. No one can understand why Lehman would come back unless it were to transition to a more senior position like CEO.

He also cited as an example former Sun Chief Operating Officer Ed Zander, who left Sun and became CEO of Motorola the next month.

So, while Sun management has said Lehman is tasked with looking at how to further cut costs and make the company a leaner, nimbler and more competitive one, few are buying it. Instead many are speculating that he is actually looking at how to restructure top management and that he could potentially be McNealys replacement.

Adding to the speculation was the prediction made in March by Mark Stahlman, a research analyst for Caris & Company, that McNealy would step down. Stahlman was widely reported as saying that when he last spoke with McNealy, he said would stay on until "the job was done," which entailed three things: re-establishing product superiority, regaining control over costs and igniting demand in a broad and balanced customer base.

"In our opinion, these three criteria have largely been met," Stahlman said. "Accordingly, we will not be surprised if McNealy does indeed decide to step down."

Next Page: McNealy speaks for himself.

McNealy Speaks for Himself

But others question whether those criteria, if they were even McNealys, have been met.

In its fiscal second quarter ending in December, Sun reported a 17 percent rise in revenue from $2.84 billion to $3.34 billion. But it posted a net loss of $223 million, or 7 cents per share compared with a year-ago net profit of $4 million.

In addition, the fall in revenue of nearly 40 percent between 2001 and 2005 has not been offset by the 27 percent drop in operating expenses over the same period.

Compare that to reports from competitors like Cisco, HP and IBM, who also took some pain during the dot-com bust but are now in far better financial shape than Sun, and it sure doesnt sound like costs are under control or that McNealys "job" is by any means done.

Sun reports its third-quarter results on Monday, April 24, which might give a clearer picture of where the company is headed.

And the final factor in all the latest buzz was a lengthy and stinging article about Suns failures, penned by John Shoemaker, who was its executive vice president of worldwide operations from 1990 to 1994 and then executive vice president and general manager of computer systems from 1995 until his retirement in 2002.

In the article, entitled "A Personal View of Sun Microsystems" and published in the January-February issue of Business Horizons, the journal of Kelley School of Business at Indiana University, Shoemaker said that, while hopeful about Suns future, "The bottom line is that its all about quality leadership. Perhaps there will still come a time when the leadership problem at Sun will be effectively and decisively addressed."

And, while he also stated that "this opinion is just my personal view and is intended only as food for thought for Business Horizons readers," he went on to say, "I do think this perspective is shared by many who were and are still at Sun Microsystems."

So, after hearing from my sources inside and out of Sun, from those who insist McNealy is going nowhere and those who believe his departure is imminent, I decided to e-mail the man himself and see what he had to say.

He responded, as he is wont to do, and this is what he said: "Sorry, dont comment on rumor, though the rumor that I am leaving Sun is about 22 years old and still going strong. You should be writing about the runaway success of Solaris 10!"

My gut feel is that theres unlikely to be a management shakeup as early as next week, but maybe we should start looking toward July, the start of Suns fiscal year. Maybe thatll be when it happens!

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