Changing of the Guard for Sun as McNealy Steps Down

In the wake of yet another poor earnings report, Sun Microsystems (Nasdaq: JAVA) on Monday announced that Scott McNealy is stepping down as the company's CEO.

Effective immediately, Sun President Jonathan Schwartz will succeed him as CEO and will also retain the title of president. McNealy will continue serving as chairman of the board.

The company said the appointment is the result of Sun's ongoing succession planning process, but analysts said that the investment community has been calling for McNealy to step down for some time.

Passing the Baton

McNealy passed the baton to Schwartz gracefully, noting that the young executive has been a driving force at Sun since joining the company in 1996 and has earned the admiration and respect of its nearly 38,000 employees, customers and partners and the industry as a whole. McNealy said Schwartz is the "ideal leader to take the helm as Sun's chief executive officer."

"His leadership has been instrumental in streamlining Sun's operations, building a solidly competitive product line, securing key acquisitions and major partner relationships and positioning us globally and across industries to reap the benefits of the networked marketplace," McNealy remarked.

Sweet Sorrow

The departure may be bittersweet for McNealy, who will escape public scrutiny by giving up what he described as "a labor of love." A Sun co-founder, McNealy served as Sun's CEO for 22 years.

"In some respects, this is a changing of the guard in the industry because Scott has been one of the five or 10 people at the forefront of technology over the last 20 years. Of course, he's still involved as chairman, but it is a significant announcement," Dennis Gaughan, an AMR Research analyst, told the E-Commerce Times.

McNealy founded Sun Microsystems along with Andy Bechtolsheim, Bill Joy and Vinod Khosla in 1982, and has been the icon for the open systems movement. He was named Sun's chief executive officer and elected chairman of the board of directors in 1984. The ideas spawned from McNealy and other Sun founders about computing have often led the way for industry trends.

McNealy will focus his efforts on Sun's government and academic relationships globally, as well as expand his role with key strategic partner relationships. McNealy will also assume the role of chairman of Sun Federal Inc., which focuses exclusively on U.S. government business.

Losses Widen

McNealy's departure comes along with news released Monday of Sun's wider loss for its fiscal third quarter. Costs for acquisitions, stock-based compensation and restructuring ate into higher revenue.

Sun's net loss for the three months ending March 26 was US$217 million, or 6 cents a share, compared with $28 million, or 1 cent, in the year-ago period. Sales grew 21 percent to $3.18 billion, from $2.63 billion, thanks to recent acquisitions that supplemented revenues.

Gaughan, however, does not believe Monday's earnings announcement led to McNealy's decision to step down. "This wasn't a rash judgment. Companies don't make rash judgments like this. I think it is something that has been in the works for a while," he said.

Jonathan's Party

Meanwhile, Schwartz is "thrilled" about the opportunity to lead Sun into a new era. "It is an honor to take the reins of this great company from one of the industry's true visionaries," said Schwartz. "I couldn't be more excited."

Schwartz joined Sun in 1996 upon the company's acquisition of Lighthouse Design, where he served as CEO. He was named Sun's president and COO in April 2004, and has been responsible for Sun's product development, sales , marketing and operations.

Schwartz has held numerous positions at Sun including executive vice president, software; senior vice president, corporate strategy and planning; and vice president, ventures fund.

Could this be the beginning of a Sun executive shakeup? Gaughan doesn't think so.

"If Sun had brought in a replacement from the outside, you would probably expect in the near term much more of a shake up in management," he said. "That could still happen, but but because it's an internal promotion I doubt we'll see any drastic change in the short-term."