The Quarter, KKR, etc.

What a week… after a slew of investor and customer calls, I thought I’d jot down a few comments and reactions. As you know, we announced our Q2 results last Tuesday, along with an investment by KKR – preceded by Monday’s announcement with Intel. So we’ve been pretty busy – and lest some of the questions I’ve heard go unanswered, here’s a quick overview.

1. What did you think about the quarter?
As I said yesterday, I’m satisfied with the team’s performance. Now, what I said to folks internally was that I was “freaking over the moon with our progress,” but our investor relations team said the financial community might have a hard time parsing that (PR said my Mum might be upset, as well), so we scaled it back to a more dignified, “I’m satisfied with the team’s performance.”

Honestly, it was a good quarter, we over achieved many of our internal objectives, and the strategic announcements drove a ton of awareness and momentum. Which are now rippling across the globe. If I haven’t recommended it before, I’ll do so now – the Tipping Point is a good airplane read.

2. Now, what’s up with KKR?
For those that don’t know who KKR are, they’re a (very) large private investor, one of the smartest and most successful in the history of investing. They’re less well known outside of financial circles, but their track record is one notch above stellar.

3. Why did you want them investing in Sun?
First, their investment is a big endorsement – they clearly see our potential. Second, we wanted their wisdom, perspective, access to their portfolio companies, engagement from some incredibly smart people – frankly, we didn’t see a downside. And in terms of the financial transaction, here’s a crude summary: (and as a caveat, this is a crude summary – if you want the exact details, please refer to this filing with our friends at the SEC.)

They loan us money at an extremely low interest rate, in exchange for the right to buy our shares if they rise above 25% of their original price. It’s called “a convertible.”

4. Do you need the money?
Heavens, no. With more than $4 billion in cash prior to the deal, one of the strongest balance sheets of any technology company, we didn’t need the money.

5. If you didn’t need the money, why are you raising it?
Because you raise money when it’s cheap, and when you don’t need it. Trust me, I’ve raised money when I needed it, I’m not doing that again. We have one of the strongest balance sheets on the planet, with $4.8b in cash and marketable debt securities prior to the deal. That opens a world of opportunity.

6. Are you going private?

7. Are you going on an acquisition binge?
We’re interested in growing the value of Sun. I’m neutral on how we achieve the best returns – organically or inorganically. But growth and volume = operating leverage.

8. Are they a hostile investor?
Absolutely not, I and the board want them involved – they’re incredibly good at what they do, which is generate value for shareholders. To make that point clear to everyone, they signed a standstill agreement agreeing not to purchase more than a small amount of the company.

9. Aren’t they just a short term investor?
Try this on for size – KKR’s average holding period for the companies in which they invest is seven years. Seven. As the CEO of any other public company will tell you, they’d love it if *every* investor behaved like KKR. Other than Scott, I’m not sure we’ve had any other significant investor hold for that period of time. What drives CEO’s and CFO’s nuts are folks who hold the stock for 7 minutes. As one of the most highly traded stocks on Wall Street, we have a lot of those types of investors. So it’s good to have stability in the investor base.

10. What other value do they bring?
First, as noted above, they have a portfolio of companies in which they’re significant investors – take a look at the list, and tell me if having an introduction from KKR might be helpful. Second, we invited (yes, invited – early on, we said it was a precondition of their involvement) one of their members to join our board – stay tuned on that. We’re hoping that’ll bring a ton of insight and expertise to the team.

And finally,

11. Is it true James Gosling threw a spontaneous celebration (known locally as a beer bust) in Menlo Park, CA last Friday?
I’m sorry, that’s confidential information, and I can neither confirm nor deny the rumor. But if we had, it would’ve been the first in… well, years. Such festivities might even ripple (in their appropriate cultural equivalent) across the globe.


Filed under General

21 responses to “The Quarter, KKR, etc.

  1. Gil

    Solid move especially if it brings you new business in Health Care which KKR has under it’s umbrella. Thought you might enjoy this one…

  2. The announcements were really great. From one day to another all dumb and not so dumb questions about our economic health, our stock and about the future of Sun ended.
    I can´t wait for the new products (N2 and Rock). Next time in this cinema: Sun strikes back 😉

  3. Charles R Martin

    Bring back bagels.

  4. Hi Johnathan,
    I rather liked Sun when Bill Joy was working on it with 6 people. I dunno if this is a buy back, but you should.
    BTW, I need the CAPS SDK for a project I am working on immediately.
    I don’t want to sound like a jerk, but do not have time to wait. I am working on a Netra T-4 4U, and need the SDK now to do EDI-INT with AS2. Please release a beta or sell it to us outright. The alternative is that I create one from RFC 4130 in PHP and that is not at all appealing, nor cost effective for our customer. We’d like to use Java on this project, but we need CAPS. Thanks.

  5. Anantha

    Congratulations to the entire Sun team. I guess Scott was not kidding in 06 when he said the ‘…turnaround is underway and it is time for me to move on…’.

  6. Sam Morris

    As far as Sun in Healthcare goes, they have continually avoided investmenting in the vertical, including laying off their healthcare expert a few years ago. Not sure KKR would make a difference.

  7. Peter

    Are KKR as brutal and ruthless as the australian newspapers make them out to be?

  8. SKI

    i would give the “going private” thing another look.
    as long as you must appease the market, you cannot make
    all the best moves. i am excited for the upward trends…
    but suspect they could really be leveraged, if not for
    the street’s self-serving influence.

  9. RJS

    Kudos for addressing the doubts surrounding the KKR transaction and pointing to the SEC filings.
    Maybe it’s just my limited understanding of those filings that sees KKR as free to have someone serve on Sun’s board or not, free to transfer the notes a few months after such a person leaves Sun’s board (and no restriction to shorting, unless that were implied by “the Company’s stock trading policies”?), which is all rather less binding than a “precondition of their involvement” (even assuming KKR is not into the shorting game). Now, as to the real cost of that supposedly “extremely low interest rate”, there’s this little “Item 8.01. Other Events”, which I have not seen analysed elsewhere, which seems to bring the interest rate to roughly 0.70+(1/7 for a fee to KKR in Item 1.01)+(102.9+125.4-66.5-79)/700/7.25*100 or about 2.4% annually, and warrants to KKR by way of Credit Suisse with the same expiry dates and with strike prices around 10 USD (now you see the dilution countered, now you don’t).
    Here’s hoping that Sun knows what it’s doing, and that shareholders will benefit from the value derived from KKR’s involvement commensurate with their preferential treatment.

  10. anonymous coward

    Wow a “spontaneous celebration” in Menlo Park? Could this spread as far as the folks in Sun Service (who work as hard as anyone for Sun, its partners and customers *and* have the results to prove it) where our mgmt. banned the “spontaneous celebration” years ago? Imagine that ;*)

    No matter, because we get the “over the moon” part and agree wholeheartedly.

  11. It is not a surprise the fact that Forbes announced as one of the disrupters of 2006 the private equity firms. I looks like we are witnessing an inversion of trend here, and there is no sign that it will stop in 2007.

  12. Well done. As for the Beer bash .. well back in the wild pre-dot-com days ( before IBM blue suits moved in on Lotus ) the management at Lotus Canada would actually push a beer cart from desk to desk handing out drinks. In the middle of the day. On Fridays only however but this made for less than stellar productivity until Monday at noonish. I think the employees were getting stock at $8 that all went to over $90 a share. Pretty good times back then. Are we over the IT slump yet? Can James throw another beer bash next quarter?

  13. Tipping Point. I think that may be an accurate description of what Sun has done over the past 6 quarters especially in terms of becoming relevant again. And that goes beyond financial numbers- if Sun can become relevant again to how computing is done, where it is done and how it is paid for, that would be the true test.
    One easy proof of the Tipping Point would be if Sun can convince Google/Yahoo!/Microsoft?/Ask to run their grids on Sun servers. May be you already have, and just need to let the street- the main street & the wall street- know.

  14. John

    As a Sun employee, I’m also delighted with the good news Jonathan! I’ve been through the roller coaster ride since I joined when SUNW was about to peak! (Aug 2000) How about declaring a global doughnut day ?!

  15. P Firmstone

    Go get em 🙂
    Today the tipping point, Tomorrow the Snowball effect.

  16. Been working around SUN stuff sporadically since ye olde OEM days. Had a SparC with Solaris 2.3 at my house. TIPPING POINT is an excellent read. Might I suggest Extraordinary Popular Delusions and The Madness of Crowds?

  17. I am waiting for SUN resurrection since 2000AD. Jonathan is doing great JOB!

  18. Read between the lines regarding the KKR “investment”:

    * this is a good and legal white-knight move to prevent hostile take-overs. KKR is known for its long-term investment there is a gentlemen agreement among Private Equity firms not to interfere with each other’s investments. After SUNW’s poison-pill measures where removed last year, this is also a good way to make Sun more expensive to hostile takeovers.

    * The convertibles are due in 2011 with a price of $7.x. KKR has high internal rate of return, and at less than 1% interest rate on the loans, this signals that KKR expect SUNW to appreciate considerably. If one were to use a very conservative IRR of 15% CAGR, this would be a double ($12-ish)by 2011. Of course PE firms expect IRR between 25% ~ 50% annually.
    * Lastly, if you look at Sun’s early VC company, Kleiner Perkins, way back in the late nineties, they helped to promote Sun’s Servers to all the dot-coms which KPCB invested in. I hope with a board-seat, KKR can also do the same.


    (who does not own any position in SUNW but has a tonne of options at $19 ~ $50)

  19. Well, this is a refreshing CEO blog. After having read a comment in Clarin’s section Weblog sobre weblogs (a Buenos Aires newspaper), I wrote this comment in my new Blog about corporate blogs.
    The first blog that I’d like to present you is Jonathan Schwartz’s blog, SUN’S CEO. Why? According to Mariano Amartino, author of the chronicle, Weblog sobre weblogs, in the newspaper, Clarín, it is one of best corporate blogs than he has ever met until now. He also underlines a comment read on the Schwartz’s blog: “A CEO who blogs is rare. A CEO who publicly admits a mistake is priceless.” … but a CEO like Schwartz and his “transparency” is unique.
    I must admit that I am really impressed by this blog. It is not flashy without being monotonous. You can read in eleven different languages while being very correctly translated. At least, for the french, spanish and portuguese versions, we are miles away from the automatic translations of search engines like Google.
    I would place it in the categories 1-3-4-7 presented in the first note of this blog. I am sorry for the other CEO’s blogs that we will visit, but as I like to say: we start with the best, too bad for the rest.
    Well keep up the good work.
    Saludos de la Argentina

  20. Sun servers for ToysRUs!!!! 🙂
    take a look at the list, and tell me if having an introduction from KKR might be helpful.
    Most definitely. Leverage!!!

  21. SUNW Private Investor

    Jonathan – Thank you for the response and perspective. Many of us share your “restrained” enthusiasm. Good on you!
    As for PIPE transaction with KKR, I sure hope this is different. My point was simply to mention my experience in that none of these deals have been shareholder friendly. At a minimum, the converts are dilutive if things go well, but usually it’s a disastrous cycle of short-selling. But perhaps if what you suggest proves true, the added strengths and leverage of KKR should be worth its involvement and potential cons. Still on the surface, loaning this sum of money at less than 1% (when it’s borrowing 50% or more of the funds), one has to be skeptical. Perhaps this time will be the first time a PIPE goes well (I/we are not interested in selling) and KKR’s interest in the equity’s upside will prove to be the only motive (risk/reward). Time will tell.
    As for your significant shareholder comment, perhaps we share different views. I’m a professional investor (trader at times). These days you have to be prudent and (in Wall St. gibberish) be prepared to rebalance your portfolio when things change or don’t change. It’s not uncommon for companies to report bad results and investors to lose 20% or more over-night…meanwhile management on the conference call makes it sounds like the company was just short of putting a man on Mars.
    “What drives CEO’s and CFO’s nuts are folks who hold the stock for 7 minutes,” you say. Well, as a private investor, what drives me/my clients crazy is the CEO and/or CFO that clamouring everything is alright/improving and next quarter, next year (pom poms waving)…and simply it gets worse. We need not spend too much time talking about how investors holding SUNW for 7 years from today have been rewarded…most lost anywhere from 83% to 87% of their investment.
    True, I haven’t held SUNW for 7-years. But a colleague of mine bought SUNW shortly after the IPO and is still holding today. Nonetheless, for many stocks the buy and hold strategy simply does not work.
    Wall St. makes fortunes with volatility and it also loves to manipulate prices…with or without excuse. Ok, perhaps it’s not as sinister as the term sounds, but it’s sinister to money managers like myself that endure huge swings often hinging on the words, actions or inactions of the CEO/CFO. Consider stocks like BIDU that IPO/open at $66 hit $153+ and crater to $45 before returning to $134. How about Vonage IPO at $17 now $5.40 (not even one year and performance is -70%). So we both can go crazy and it has nothing to do with traders holding for 7 minutes, days, weeks, months, or years. Simply these people provide liquidity vs. move markets. It has everything to do with Wall St. (call it big or smart money) behind a stock controlling the price and shares.
    I could go on and on with manipulative stories that would glaze your eyes…from Mark Cuban shorting IIG to near bankruptcy (rebounded back to $30) to the consistent disparagement of GLW (Corning) down to $2 where some broker stuffed several million shares of the stock into Gordon Gund’s account (rebounded to $30) to dragging Comcast down $29 filling Warren Buffet’s accounts with several million shares of CMCSA stock to all kinds of schemes and techniques Wall St. conveniently calls “trading.” It’s highly manipulative and typically comes down to who has the most resources. Amarath vs. Goldman Sachs in natural gas? Look no further than Goldman’s 2006 bonuses. More? Take a look at gold. Do you think it was 7-minute traders that brought gold from $650 to $609 within the first weeks of trading in January? Guess again. It was significant pressure associated with big money that brought it down, and the same people privy to knowing when the short-selling/selling stopped are the same ones that brought it right back up only to $660.
    These few examples and related volatility are not your typical, retail 7-minute trader. The stakes and demands for profits are enormous which is why investors examine a company’s every move with skepticism. Many are doing doing the right thing others don’t realize they’ve stepped into the wrong ring. So along these lines, the days of traditional investing–I’m truly sad to say–are disappearing. Buying and holding in most cases will be a losing proposition unless of course you or a group have the resources and time to maintain the controlling interest. Simply, you have to trade and rebalance accordingly if for no other reason changes in the business cycle that can crush most small investors.
    Anyway, enough about stocks and investors. Your response was nice to read and I/we thank you for your comprehensive and candid response. I really enjoy reading your blog and respect how you’re handling things and keeping things so lively and interesting. My best to you and all at Sun.
    SUNW (semi-significant) Private Investor

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s