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Shrinking Sun under the gun

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Comment Here, with the stock market melting, we find Sun Microsystems in most uncomfortable territory. It's got a stock market value of $7.7bn, which means that the one-time lord of the servers is a mid-cap company.

Our friends on Wall Street warn that Sun needs to maintain at least a $10bn market capitalization to stay in the large cap territory and part of the large cap funds. Should Sun hang around in $7bn country for too long, then a sell-off will start, making things even worse on Sun investors. (In addition, a whopping 57m shares, nearing 10 per cent of all out-standing shares, are already shorting Sun, up from 25m last month.)

The odds of Sun bounding back to large cap status don't look too good if you focus on the near-term. Sun's due to report fourth quarter results on Aug. 1. Typically, the fourth quarter is Sun's best, although the current economic climate fails to inspire much optimism. "Given Sun's reliance on the transactional server business in a weak IT spending environment and exposure to the no-growth Unix market, we believe that the company will find it challenging to boost revenue growth over the next few quarters, especially if the dollar stabilizes or appreciates," Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co., wrote in a recent research note.

Sun will really need to surprise investors on Aug. 1 to get that JAVA stock heading higher. Without a shocker, Sun shares will likely keep declining.

Sun's stock market value raises other concerns because it leaves the company looking very much like an anomaly among its peers. Try and find another $7bn-$8bn company with 30,000 employees.

We've always admired Sun management's stance of viewing mass layoffs as something to be avoided at all costs. In addition, we've bought into the idea that a revamped Sun could rebound from darker days and grow again, which served as the basis for keeping so many staff on board. Sun Chairman Scott McNealy would often remark that you want warm bodies around when the orders start flooding in, and you want morale as high as possible before that point as well.

It's difficult to see how Sun can cater to such feel good tenets given the realities of its situation.

The company has gone through a number of smallish layoffs. It's made many acquisitions - both large and small. It's rolled out new product lines. It's tried to generate fresh momentum through various, creative open source plays. So far, however, these moves have failed to result in a meaningful, lasting momentum shift that could really accelerate Sun's growth. Sun has been hunting for a dramatic game changer, but such a product or approach has failed to arrive fast enough.

We're left with a company heading toward $7bn in market cap territory that has close to $4bn in cash, an immense intellectual property portfolio, a massive customer base, some very strong technology and a still admired brand.

Enter FuSu.

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