On the day Scott G. McNealy stepped down as chief executive of Sun Microsystems, the company's stock shot up 7.4% in extended trading, reaching its highest level in a year. But there was no evidence the nod of disapproval made even the slightest dent on McNealy's self-esteem. "This was my decision, and it was supported by the board," McNealy said on a conference call discussing executive changes that include naming Jonathan Schwartz as CEO. "The timing fit me to a T."
Turns out McNealy's prickly self-confidence has truly taken root at Sun (SUNW), the company he co-founded in 1984 and made him a household name in tech circles. All signs suggest that the company has no plans to make any of the drastic changes that investors seem to be clamoring for. Since the company's sickening fall from grace in 2001, McNealy's valiant efforts to restore growth and profit without slashing spending on R&D have failed to pay off for shareholders.
Schwartz says that while he will undertake a broader-than-usual review of Sun's business plan, he has no intention of swinging a big ax or making any moves that aren't in keeping with McNealy's view of the world. "This is not about how we take a whack to headcount," Schwartz said. "The goal is to make sure we focus on top-line growth and increasing the value of our shares."
HOPEFUL SIGNS. McNealy is assuredly not leaving on a triumphant note. The company lost $217 million in the fiscal third quarter, compared with a $28 million loss a year earlier. And analysts don't expect the company to turn a profit until fiscal 2007.
Still, there are hopeful signs of progress. Sales grew 21%, to $3.2 billion in the quarter, which ended Mar. 31. That was slightly shy of many analysts' expectations, but the company noted that sales of its core computing products had the best growth in two years in the critical U.S. market.
Gross margins rose nearly 2 percentage points, to 43%, due to slightly more aggressive cost cutting and better unit sales. McNealy insists the product line is stronger than ever, and that Sun has fixed quality problems that added to its challenges in recent years. "Our product quality is off the charts," he says. "I can't find upset customers."
"They're in a much better fighting position than they have been in years," says Laura Koetzle, an analyst at Forrester Research.
THE POPULAR GUY. So why make the change now? While McNealy, at 51, doesn't lack for energy or passion, it has long been clear that his departure would give a pop to Sun's languishing shares. Schwartz's rising reputation may have been a factor. When the pony-tailed 40-year-old was given the title of president and chief operating officer in 2004, the skeptics outnumbered the fans. A software entrepreneur who came to Sun when his company was purchased in 1996, many felt he lacked the operating chops to run a major hardware company -- and many customers and partners interpreted his intellectual eloquence as arrogance.
But he's earned many fans since then. "Like most people, I was a bit surprised when they made him COO, but most everyone believes he's done a really nice job," says Heidrick & Struggles recruiter John Thompson. "My sense is that Jonathan was beginning to be heavily recruited. I don't think he had an extraordinary sense of urgency to be a CEO, but the board probably felt that if we don't show our hand to Jonathan, someone else would. It's better to plan the transition, than have someone else force it on you."
By late last year, Schwartz's star was showing signs of rising. He was offered a seat on the board of chip design software maker Cadence Design, but McNealy asked him not to accept -- possibly because McNealy knew Schwartz was going to have more than enough on his plate in short order.
STRENGTH IN SOFTWARE. Cadence CEO Mike Fister won't say whether Schwartz was offered a board seat, but says: "Jonathan is an amazing guy. He's one of the most eloquent, thoughtful people in the contemporary software business."
Indeed, Schwartz seems to have the same penchant for radical, headline-grabbing strategies that helped make Sun one of tech's most dynamic companies. Sun has rolled out a slew of technologies that have contributed to the growth of the Internet -- particularly Java software, a language that enables programs to run on almost any kind of hardware.
In the past two years, Schwartz has championed Sun's decision to distribute the company's Solaris operating system through the open-source model. While it's unclear how Sun will ultimately benefit, five million programmers have downloaded the software, which formerly was available only on high-priced Sun hardware.
MCNEALY'S NEW ROLE. Now, the question is whether Sun's ability to point out compelling visions will translate into results an investor could love. In many ways, the executives are reversing roles. During Sun's lean years, McNealy became far more of a Mr. Inside than the showman he was during the Net boom, when he was famous for throwing edgy barbs at competitors -- particularly Microsoft (MSFT). It was Schwartz that took the lead as Sun's Mr. Outside, commenting on industry trends and much else via his well-read blog.
In his new incarnation, McNealy says he will resume his role as a spokesman. He'll stay on as chairman, and as chairman of Sun Federal, which sells to government customers. He says he'll spend more of his time on airplanes, pitching Sun's products and view of the tech world to heads of state, government officials and big customers. "Scott is going to be more actively involved with our customers than he was in [recent years]," Schwartz said.
Indeed, McNealy says his goal is to be "full-time chief evangelist," a role that will let him globetrot without having to suffer the jetlag that comes with returning to Silicon Valley for operational reviews.
SIMILAR CEOS. Whatever their new titles, it's apparent both executives will continue to sing off the same hymn sheet. Schwartz began his comments during a press conference by noting the two reasons most people in Silicon Valley go to work: "You love your job, or you love your boss. I've been in the rare position to have both."
Then, directing his comment to McNealy, he said: "I admire the hell out of you, and I'm looking forward to counting on you for the next 10 years."
It's not clear that's going to sit well with the world beyond Sun's executive suite. "I frankly hoped for someone different -- someone from the outside," says one former Sun executive. "Scott and Jonathan are very much alike. Jonathan is a very bright guy, and a phenomenal ideas person. But where Sun has needed to improve is on execution."
THE "RIGHT TRACK." And even if Schwartz wants to chart his own course, it won't be easy with McNealy staying so closely involved. Many corporate governance experts say it's a formula for trouble: having a powerful, charismatic founder looking over his shoulder -- especially someone like McNealy, who for years after the Net bubble burst resisted calls to make bolder cuts, including from then President Ed Zander, who's now (see BW Online, 7/26/04, "CEO of Motorola").
Indeed, Heidrick & Struggle's Thompson notes that CEOs brought in from outside the company often have much greater ability to set a new course -- right down to driving for changes to the company's board.
Sun's two top executives say that's a non issue. "You're going to find us way more alike [than different], because we both think we're on the right track, our board thinks we're on the right track, and our customers think we're on the right track," McNealy said. He didn't mention the investors who've kept the company's stock in a four-year holding pattern.