Job Cuts at Sun Micro

In a filing with the SEC, Sun Microsystems Inc. (JAVA - Snapshot Report) announced to cut its headcount by 3,000 or 10% over the next 12 months, given the delay in getting European Commission clearance for its merger with Oracle Corp. (ORCL). 

Sun said that the job cuts will affect all of the company’s major regions, including North America, Europe, Asia and emerging markets. The company expects to incur $75 – $125 million in restructuring charges over the next several quarters. The company said it will record the majority of the charges in the second and third quarters of fiscal 2010. 

Oracle, the largest software company, had proposed the acquisition of Sun Microsystems for $7.4 billion ($9.50 a share), which has been slowed by an ongoing antitrust review in Europe and the company is still waiting for clearance by the European Commission. 

The delay in approval from the regulatory body is causing Sun Micro to lose about $100 million each month, the company said earlier. The deadline to approve the deal is Jan 19. The deal has been approved by the U.S. regulators. 

Previously, Sun had eliminated 7,600 in the past three years. The company, which is under severe financial pressure, has been trying every means to survive the worst recession. The company currently employs 26,000 employees. 

Sun’s performance has not been good for quite a number of quarters; the company has been struggling to make profit. It had reported a loss of $2.2 billion in the last year ended June. The company said that customers are being cautious due to the delay in the acquisition, which has resulted in such decline. Moreover, rivals such as International Business Machines (IBM - Analyst Report), Hewlett-Packard (HPQ - Analyst Report), Cisco Systems Inc. (CSCO - Analyst Report) and Microsoft (MSFT - Snapshot Report) are taking advantage of the delay. 

The acquisition of Sun will give Oracle more control over the development of Java, a key technology used in its products. The major issue in the delay lingers on Oracle's potential acquisition of Sun's MySQL – an open-source database software which overlaps Oracle’s own database software. This could smother competition in the database software industry. 

Despite cost-cutting efforts and increased layoffs, we remain concerned about the delay in closing the merger, which could erode Sun's profit, and reduces its value for Oracle's business. 

We have a Neutral rating on both Oracle and Sun Microsystems.