Sun, Novell, and Cray - Time to go private?
When The Meltdown is good news
For the most part, the downturn on the global stock markets is bad news for IT vendors and the institutional investors and individuals that invest in them. But for some, it might be good news.
Even with the rally yesterday on Wall Street, which ricocheted around the world to other markets, there is still a chance for some financially challenged IT players to make a move that could save their futures: Take themselves private.
As we go to press with this story, an early 400 point rally in the Dow Jones Industrials has petered out and tech stocks are taking a slide, pushing down the NASDAQ by 2.5 per cent. It is still a buyer's market unless Wall Street puts something like 4,500 points on the board, which would be a 50 per cent increase to get the Dow Jones back to its 14,000 peak level from a little more than a year ago. Don't hold your breath waiting for that to happen - unless you are sharing some DNA with a whale.
With Uncle Sam now saying that it will dedicate as much as $250bn of the $700bn bailout plan to buying up stock in the leading (i.e. remaining) big banks in the States, the banks will be able to make loans sufficient for some important but financially challenged IT companies to buy themselves off the markets. And by doing so, they will be able to invest when and how they see fit and be better able to create strategies for their long-term survival and future profitability - rather than jumping to the 13-week beat of the Street.
If they survive the transition to going private, they can always come back to the public markets once they are doing better financially. And if they don't, there are at least four fewer disappointing news days for the companies I am thinking might want to go private.
The company at the very top of the list is - no drum roll needed - Sun Microsystems. While Sun's Solaris is one of the best operating systems on the planet and its servers are decently engineered, the company is spending far too much time justifying its strategies to investors and not enough time selling its products and building up its channels.
A mid-day today, Sun's stock is trading at $5.90 a pop, which gives it a market capitalization of $4.28bn. As of the end of its fiscal 2008 year in June, Sun had $2.27bn in cash and $429m in short term investments (probably lower now, but who knows what Sun has invested in). The point is, with another $1.58bn or so plus a modest premium, Sun could buy up all of its own stock and be done with it.
That is not much money to pay for a barely profitable $13.9bn server and software maker that can probably be profitable with some cuts. Cuts that Sun has not been willing to make to appease Wall Street because its top brass has believed - and continues to believe - that good engineering and marketing can boost revenues and make Sun more profitable.
If Sun has a bad quarter or two and its share price gets cut in half, then Sun might be able to go private with cash and not even have to borrow funds. (Private equity firm KKR already kicked in $700m in cash to Sun in January 2007 and has a seat on the board). I'm not suggesting the company should engineer such a stock crash on purpose, but the nature of IT spending in the face of tremendous uncertainty in the global economy means it may just happen on its own.
It would have to be a pretty bad set of quarters, since Sun's 52-week low of $4.68 a share was set on October 10. The company's year high, last October 17 after a four-to-one reverse stock split, was $24.40. At the peak of the dot-com bubble, Sun was trading at more than ten times this level ($257.35 on October 4, 2000, adjusted for splits and reverse splits) and had a market capitalization approaching $200bn.
Another IT vendor on my privatization list is Novell, the maker of the venerable NetWare network file system and a commercial Linux supplier since late 2003. While SUSE Linux has helped prop up Novell as it declines - much as Sun's multi-core Sparc T and x64 servers have kept it from sinking as its legacy Sparc base declines from intense competitive pressure - the company has not been able to throw off the kinds of profits that a maker of proprietary software mixed with open source support should be able to do. Novell had $481m in sales in the six months ended July 31 and has lost $9.3m.
This afternoon, with a market capitalization of $1.62bn and $974m in cash and $391m in short-term investments, Novell is within spitting distance of being able to take itself private. At this point, if the surviving members of the Noorda family might want to kick in the money (if they invested their inheritances wisely) to get the company back. The family's patriarch, Ray Noorda, turned Novell into a software powerhouse in the network era but did not found the company,
Supercomputer maker Cray also makes the IT privatization list. But Cray doesn't have much cash, its revenues are choppy, and its does not profit in as many quarters as it loses money in recent years. At the end of June, Cray had $90.1m in cash and $14.9m in short term investments, but today it has a market cap of only $149m. Cray has only made $72.9m in sales in the first half of 2008 and lost $15.7m doing it.
The company has some big development projects, but sales are choppy at the high-end of the supercomputer market. Which explains why Cray is so enthusiastic about the CX1 baby supercomputer it just announced with Microsoft and Intel: This is something that might give Cray new customers in a much broader market.
Silicon Graphics, once a high-flying Unix workstation and supercomputer maker, should also think about going private. The company's shares trade on the small cap portion of the NASDAQ exchange, and it has a market capitalization of $101m as we go to press. In the first six months of 2008, SGI posted sales of $172.9m but booked losses of $74.9m. The company had just under $40m in cash as the June quarter closed.
If these companies cannot be taken private, then maybe they should be acquired. Sun has a natural affinity and existing partnerships with Japanese computer maker Fujitsu. Novell would tuck nicely inside of IBM's Software Group, should IBM win or settle its lawsuit with SCO Group over Linux and Unix intellectual property. Cray and SGI could fit inside any server maker wanting to bolster its HPC biz, particularly with Uncle Sam, but it is hard to imagine foreign ownership of Cray and even a non-U.S. buyer for SGI might be a tough sell. ®
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