The Leading Lights Leaving Sun

A mass departure of talent spooks investors

When Merrill Lynch & Co. analyst Steve Milunovich introduced Sun Microsystems Inc. (SUNW ) President and Chief Operating Officer Edward J. Zander at an industry confab on Mar. 29, it wasn't with the normal niceties. "We're really glad to have Ed Zander here with us tonight," Milunovich joked, "because everyone else at Sun has retired in the last week."

And now, so has Zander. On May 1, Zander, a strong No. 2 to Sun CEO Scott G. McNealy, announced he will bow out as of July 1. The 55-year-old joins three members of what had been one of high tech's most stable management teams, who all announced recently that they will retire on July 1: Executive Vice-President John Shoemaker, 59, who runs the server business; Chief Financial Officer Mike Lehman, 51, a 15-year veteran; and computer services chief Larry Hambly, 55, one of Sun's first employees. What's more, chief counsel Michael Morris has given up that title to run Sun's lawsuit against Microsoft Corp. (MSFT ), and Stephen DeWitt, who ran Sun's low-end server-appliance efforts, recently left.

Add it all up, and a fifth of Sun's top 20 execs are heading out the door--right at the end of one of Sun's toughest years. This exodus has clearly alarmed investors. The shares dropped 15% after Zander's announcement, to $6.90--and that's down from $63 in August, 2000. "It begs the question: Are all these people leaving because the road ahead is going to be particularly tough, and it's just not worth it?" asks Sanford C. Bernstein & Co. analyst Toni Sacconaghi Jr.

Certainly, the road won't be easy. A top beneficiary of the Internet bubble, Sun was a big victim of the burst. Sales are expected to plummet 32%, to $12.4 billion, for this fiscal year, estimates Goldman, Sachs & Co. And it has lost money for the past three quarters. When business spending turns around, Sun can't afford to miss a beat. It lost huge share in its core UNIX server market when Web and telecom customers imploded, and analysts say it must fight to regain those customers against IBM with its mainframes and PC rivals such as Dell Computer Corp. Plus, Sun must earn its stripes in the emerging world of Web-services software.

Still, Sun execs insist that the outlook has nothing to do with their leave-taking. Zander, Shoemaker, Hambly, and Lehman all say they intended to leave a year or more ago but stayed on to manage Sun through the downfall. That has also given them time to groom replacements. Since McNealy joined General Electric Co.'s (GE ) board in 1999, he has tried to follow the Jack Welch model and make succession planning a priority. And Sun does have seasoned execs in place to fill the posts. New Chief Financial Officer Steve McGowan, who has shadowed Lehman for six months, had been finance chief of Sun's server business.

But if this mass retirement was planned, it was a well-kept secret. "If they had been more public about what they intended to do, then it might have been easier to understand," says Jean S. Bozman, research director at International Data Corp.

McNealy says a strong quarter ended Mar. 30--Sun regained share in the Unix market, and gross margins rose five points, to 42%--means the company is ready for a changing of the guard. The loss of Zander won't be easy to overcome, however. Known for his marketing, operations, and customer-schmoozing skills, analysts credit him with delivering earnings and growth while McNealy attended to strategy. "You may have succession plans, but that doesn't mean it doesn't hurt," says Lehman Brothers analyst Dan Niles. "It's another reason not to buy Sun."

The exodus leaves more day-to-day management to McNealy, a role he relinquished in 1998. He'll take back the president's title he bequeathed to Zander that year and has no plans to hire a new COO. McNealy's goal is to integrate all the businesses. To that end, Zander consolidated software and marketing before announcing his retirement. Having first discussed leaving with McNealy a year ago, "all the boxes on my checklist have been filled in, and this is as good a time as any," says Zander. Wall Street seems to have a longer checklist.

By Peter Burrows, with Jim Kerstetter, in San Mateo, Calif.

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