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A Rotten Apple and A Rising Sun

by Timothy Szykula

Sun Microsystems and Apple Computer have been in the news frequently with talks of a possible buyout. No contracts have been signed so far.

Examining Apple and Sun individually, we can see why the idea of Sun purchasing Apple may not be financially sound.

Sun proposed to purchase Apple for $27 a share, a price that hardly takes into consideration Apple's current trading value of around $30. The quarterly numbers that Apple posted last month, however, make this bargain bid seem understandable.

Apple's stock price has tumbled from the low fifties to the low thirties in the last seven months. The last quarterly earnings report showed a loss of $69 million. Apple subsequently announced that they were laying off 1,300 workers, roughly 8% of the total work force.

Industry analysts have also reported a dangerous trend running through Apple: their best employees are looking for other jobs. These facts were summed up by Stan Dolberg of Forrester Research who said, "whether they stand alone or are acquired, Apple as we know it, is cooked."

So what does Sun see in Apple? To begin with, Apple generates revenue around $10 billion a year, compared to Sun's measly $5.4 billion. Apple also claims 14 million loyal customers worldwide, and has a strong sense of brand name familiarity among personal computer buyers.

The real attraction, however, is Apple's ties to the Internet. Roger McNamee, a principal with Integral Capital Partners, investment capital and management firm in Menlo Park, California, said, "It has lots of assets particularly in the area of the Internet. The Mac is the easiest Internet platform out there. It is the preferred platform for Internet software development. It has been surprisingly successful with its new line of Internet servers. Its got to be appealing to Sun."

Sun itself is not a stranger to the Internet either. It is currently developing a heavily hyped software product called Java, which should challenge the best Internet programming software currently available. Sun's experience with the UNIX operating system also has allowed it to claim a huge share of the Internet servers market. A merger between the two companies could create a chance at controlling a large portion of Internet market, both in software and hardware, the user and the provider ends. This would lead to huge financial gains, since the Internet shows no signs of slowing in its growth. Rumors has it that Sun may port the MacOS to the Solaris platform, possibly hoping to add a familiar end-user interface to its own version of UNIX.

Sun official have also suggested that the microSPARC chip, one of the many RISC chips on the market, may replace the PowerPC chips as the main CPU for the PowerMac series, which is also based on the RISC architecture. Of course, all these are only speculations since the details of merger are still sparsely known.

Sun and Apple have been to the bargaining table before several times in the past, but nothing has come of the meetings except to draw other players into the game. Other companies such as IBM, Oracle, Sony and Motorola have all taken looks at buying Apple as well, but no one has pursued a purchase with the enthusiasm Sun has.

Buying Apple just below its current market value may not seem like a conventional offer, but Scott McNealy, the CEO of Sun, is not a conventional businessman. He is a tightwad, shunning at such insignificant expenses as art in Sun's offices, or lunch at a restaurant costing more than $10. These actions make little sense when, on paper, McNealy himself is worth $97 million.

He has suggested to his executive board several times to eliminate his salary altogether, but they have yet to approve that idea. In other words, McNealy runs his business the same way he runs his life, without extravagance.

It remains to be seen if McNealy, famous for his memorable one-liners such as "Have lunch or be lunch," and "To ask for permission is to seek denial" will pull off this unusual merger. If he were to succeed, then this merger could turn out to be the one of the top bargain deals of the 90s.

J. William Gurley, an analyst at CS First Boston in New York, summed the situation up best when he said, "You can see what the market thought of Sun acquiring Apple when the stock fell four and a half points Tuesday and was down again today. And the joke going around is that the reason IBM was up four points today is because everyone is happy it's not them buying Apple."

Sources: The New York Times, USA Today, c|net the computer network, Business Week.


Sun Microsystems
Java: Programming for the Internet
Solaris Products Information
Mac OS Homepage
Apple Computer


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