Sun Starts to Fail: Who Follows?

Rob Enderle

I was at the Phoenix Technology Strategy 2009 conference for the last two days and, as you would expect, the vendors who attended are very concerned about the future. It is interesting to note that Phoenix actually is putting together what might be termed a PC Application Store, which could grow to be similar to what Google has done for the Android platform and Apple has done for the iPhone. We'll talk more about that later but today I'm going to focus on how to choose a surviving vendor.


Sun popped up this morning as a company trying to avoid failure by finding a buyer and after they had cut a deal with their one-time mortal enemy in order to get some much needed cash. Sun is trading at a 13-year low and in October reported a $1.7 billion quarterly loss, which has created speculation that the firm will be sold. But for what price do you sell a company that is losing $1.7 billion a quarter, in a buyer's market? Sun is a very complex company that would be very difficult for those that have the money to integrate. Finding a buyer will be almost impossible. I'd see if Michael Capellas would be willing to come on board to fix this, since he has done similar work successfully at Compaq and WorldCom. He is now at First Data Corporation. The best chance for a buyer or help will likely either come from the same pool AMD just pulled from or Lenovo in China.


The odds don't favor Sun surviving this at the moment. Certainly not intact, anyway. It is likely to be followed by others. So how do you choose who wins and who fails?


Balance Sheet, Income Statement, and Market Potential


If there was ever a need to get to know your CFO and his staff, this is it. They should possess the skills needed to help you make your vendor choices. On the short list of those who are likely to fail are vendors currently burning cash and without much reserve. This would include firms that are running at a loss and are venture funded (funding rounds have all but dried up completely), firms or efforts that are living on contributions (even the idea of extra cash has evaporated), and firms that have too much of dependency on the U.S. consumer market (which appears to be the hardest hit). Even if they are running profitably, they could be at high risk if they don't have sufficient reserves, because things will get worse. Look at the company's product portfolio. You want to see as much annuity revenue tied to critical services as possible. This market will force buyers to choose between redundant services and suppliers to cut their own cost, and that will most hurt a firm that is typically third choice and help one that is typically first choice for any related business.


What you want to see in a firm is a strong history of profitability, good revenue diversity, and strong cash reserves. These will be the firms that will typically be doing the acquisitions, and least likely to face some type of catastrophic event over the next 36 months. Although, nothing is certain.


Areas of Strength


I think there will be a number of areas of sustained strength in the U.S. market. Energy with a focus on conservation, exploration, or alternatives; competitive cloud-based services and outsourcing; and consolidations/integration/interoperability tools and services should all strengthen in this market. But, while firms with substantial capability in these areas should be financially more robust, they may also be increasingly focused on the parts of the business generating the most profit. Make sure that where you are engaging the firm will remain relevant. It wouldn't be any better to find the firm you'd chosen remained strong but discontinued the line of business that supported the critical offering you purchased.


Wrapping Up


Spend some quality time with your CFO. Suggest they take a look at and make recommendations about the financial health of the vendors you are considering. The big multi-nationals should generally be safe and remain that way, but in the current market, it may be wise to ensure you are as safe with your vendor choice as you can be. Looking brilliant at the moment, and not looking like you were part of a problem later on, will likely go a long way towards ensuring you won't be one of the resources outsourced in the next round.


The technology industry is likely to emerge from this market both stronger and smaller, and the geographic center of the industry may shift to China or India, but one thing is for certain, it will forever be changed.

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