Sun's balloon Popped

Unbeknownst to most shareholders, Scott Mcnealy and cohorts, back when he was running the show as CEO, did something important when he made two large acquisitions over the last 18 months, trading away a lot of his cash. He Pierced the Hope Balloon. Why do I say he did this? As long as Mcnealy had a lot of cash at Sun, investors could always hope that the feisty CEO would do something extraordinarily exciting, or creative, or transformational, or ideally, all of the above. But he did none of that.

Instead, well he bought StorageTek, a stuck in the mud tape and storage company that sells into the declining IBM Mainframe market, and a marginally profitable service organization called SeeBeyond.

These "bold" moves by Mcnealy have now forced the hand of Wall Street research reporters into being realistic themselves. Mostly, this terminally optimistic bunch likes to give Sun Micro the benefit of the doubt, as they wait patiently for the transformative event to happen. The possibilities of investment banking business for their firms makes the wait profitably tolerable.

Now though, with these two acquisitions, Wall Street's finest have lost this ability to let their imaginations run wild, and consider the possibilities of what might have been. Instead they will have to add the reported numbers of a very stodgy tape company (boring!) to that of a profitless computer company (equally boring). The pizzazz is gone. The HOPE is gone. The endless possibilities...gone.

The model now looks surprisingly tame and it will be unexciting for investors, until visible cracks in the Sun story again begin to show, sometime in the next 18 months or so. Then Mcnealy's wet behind-the-ears successor, Jonathon Schwartz, will have to take the Sun human resources hatchet out yet again, and lop off even more jobs, and close down even more facilities. And then the reality will be demonstrated that Mcnealy's model for Sun Microsystems was nothing more than Silicon Graphics-DELAYED.

These moves to replace cash with no-growth, albeit cash producing assets has temporarily stopped the downward spiral in the business, but in doing so, Mcnealy capped the upside of the shares. The Hope Balloon has deflated. And now all that's left is Prayer. You see, Wall Street has already marked the shares up in anticipation of rapid growth, growth that Mr. Schwartz hints at each time he speaks, or blogs, which is to say, often.

18 research analysts cover Sun and the average "guess" for its earnings in the year ending June 08 is all of $0.15. Yes folks, Sun Micro is trading at 35 x F08 guesstimates. Remember that this company hasn't made a dime from its operations since the tech bubble 1.0 burst in 2001.

These shares are way overvalued because tech investors are looking in the rear view mirror here. They see a once glorious technology company, instead of the reality, that of a profitless computer company, in an increasingly competitive business.

But there will always be bountiful Hope for Sun Management, who have been be paid exceedingly well over the past five years (since the bubble burst), for what is essentially a big cleanup job of a gargantuan mess of their own creation. Think New Orleans after Katrina. The Sun shareholders and board of directors, however, seem only too eager to let many of the same folks who created this big mess, clean it up, and at no small cost to owners.

Although SUNW shares have recently taken flight, and lofty valuations have been achieved again, the hope balloon for shareholders has popped. Its only a matter of time before the price of the stock, follows hope.