Private equity firm Southeastern Asset Management Wednesday ratcheted up its investment stake in Sun Microsystems, just two days after the company forecasted a dismal outlook for future earnings.
The Memphis, Tenn.-based investment group increased its stake from 16.6 percent as of July to 21.2 percent, paying approximately $2.1 billion for 160.6 million shares, according to an SEC filing.
Southeastern is Sun's largest investor, and is run by chairman and CEO O. Mason Hawkins. As the company's biggest stakeholder, Southeastern seems to be putting a squeeze on Sun and has now included some not so subtle strings attached to the deal.
"In this situation, Southeastern has talked to the issuer's management and will have additional conversations with management and/or third parties, regarding opportunities to maximize the value of the company for all shareholders," Southeastern said in its filing.
"Any investor with more than 20 percent of the stock is going to have to be listened to," said Cross Research analyst Shannon Cross.
Sun spokesperson Dana Lengkeek said, "We are aware of Southeastern's 13D filing. We welcome feedback from our shareholders and value their input. We look forward to continued productive discussions."
Southeastern did not respond to calls for comments.
On Monday, Sun issued preliminary results for the first quarter in fiscal 2009, ending Sept. 30, 2008. It warned that it expects to post revenues between $2.95 billion to $3.05 billion, a sharp drop from $3.22 billion in revenues from the same period last year. So far this year, Sun shares have nose-dived by nearly 80 percent.
An already jittery Wall Street reacted by shedding 17.5 percent in shares in Tuesday's trading session. Sun will release the official first quarter report on Thursday, Oct. 30.
Sun CEO Jonathan Schwartz said the lowered outlook was due to the combination of several factors, including the current economic environment, Sun's operating results, and a sustained decline in Sun's market valuation.
"Sun and its customers are seeing the impact of a slowing economy," Schwartz said in a statement. "We believe we are positioned to offer the kinds of products that can radically help customers reduce expenditures for their infrastructure from Open Storage to Solaris-based Chip Multi-Threading (CMT) systems to offering the most eco-efficient systems in the market."
Responding to the company's gloomy outlook, analysts strictly cautioned investors. In a research note, Cowen & Co. analyst Louis Miscioscia said that although Sun has an installed base of existing loyal existing customers, "there is a continued slow bleed here. Without getting more aggressive is software or services or the launch of Rock, we do not see Sun emerging from its slow decline."
Thomas Weisel Partners analyst Doug Reid chimed in and predicted that Sun would have "flat to slight growth" in fiscal 2009.
"We believe that the company will continue to face pressure as ongoing market share shifts to Windows-based servers from UNIX servers," said Reid in a research note.
In related news, on Thursday Sun co-founder Andreas von Bechtolsheim announced he will work part-time at Sun while he devotes time to startup Arista Networks where he will be as chairman and chief development officer. Formerly known as Arastra, the company provides cloud networking solutions for large datacenter and other computing environments.
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