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Sun's not so cheap trick doesn't work

A Unisys look-alike?

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Sun's share price has fallen so low it is about the same as before last year's reverse stock split. So is Sun turning into another Unisys?

In September 2007 Sun proposed a 1:4 reverse stock split (stock consolidation) to its shareholders as its share price headed down to $5, continuing a long fall. The three benefits were said to be an "increased, more attractive stock price ... [which] could return ... to a level that we believe is more consistent with other major, widely held companies ... reduced stockholder transaction costs [through] lower commissions to trade a fixed dollar amount of [Sun] stock ... [and] increased earnings per share visibility". The split went ahead in November, and the stock price went up to $20.

Hey presto. Or not. The stock is now down to $5.21 and the Sun's market capitalisation is under $4bn at $3.88bn. In August Sun authorised a $1bn share repurchase program because the funds of an earlier $3bn one, announced in the last quarter of 2007, were nearly exhausted. The addition was justified because, Sun CEO Jonathan Schwartz said, "[of] confidence in the continued growth of Sun's business and an ongoing commitment to increase shareholder value".

His confidence was misplaced. Whatever money Sun has spend on supporting its stock price since the split has been wasted, as the shares have lost three quarters of their value since then. (Sun spent $2.76b on share repurchasing in fiscal 2008.) In fact, adjusting for the stock split, Sun's pre-split September 2007 share price of $5 would now mean the shares were now worth just $1.20.

The Sun board and CEOs McNealy and Schwartz have presided over a stock price fall from the September 2000 dot com peak of $241.50, through a December 2000 2:1 split to $121.75, and now down to an effective price of $1.20, ignoring the November '07 reverse split.

Things are not looking up. Fiscal 2008 saw revenues essentially flat: $13.9bn vs fiscal 2007's $13.88bn, and net income down from fiscal 2007's $473m to 2008's $403m.

It was revealed that Schwartz' pay package was worth $11m in September, even though his commitment to increasing shareholder value has not been successful; stockholders who bought the shares in December 2000 have lost 98 per cent of their money.

Schwartz is now talking about a business cycle affecting everybody and says the reverse stock split was just cosmetic, as sophisticated investors should have known what was going on. A cheap trick, in other words.

You get the feeling that Sun is still yearning for its glory days and thinking it can still make it back, whereas for many observers Sun is a Unisys-type company. It's large, complex, twists and turns and has lots of strategies, but never finds the magic seed of growth inside itself. The spark has gone out and none of the myriad attempts to rekindle it have worked so far. Maybe it's time for a dose of CEO creativity, as more bad results are likely in the quarters ahead. ®

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