McNealy steps down at Sun

Sun Microsystems co-founder Scott McNealy has stepped down as chief executive, and has been replaced by President Jonathan Schwartz, the company said Monday.

McNealy, who will stay on as chairman, was one of four co-founders of Sun 24 years ago and has been CEO for the last 22 of those. Since then, he has been a strong and often contrarian voice for change in the computing industry, but in recent years his vision hasn't translated into financial success.

"Jonathan has risen to the top of the class, and he is ready," McNealy, 51, said in a conference call. The move was planned, he added: "It's part of our ongoing succession process we've been working on since my days at the (General Electric) board."

Scott McNealy

Schwartz, 40, said the main difference under his leadership will be a greater emphasis on "growth and financial performance, now that the technological performance and customer performance is back at a level we think is reasonable," speaking on the conference call.

"My team is going to be more focused on growing the business, finding new customers, seeking the new adoptions, finding the new opportunities around the world," Schwartz said.

"We're not planning on changing the strategy," he added.

The change makes sense, said Illuminata analyst Jonathan Eunice, who likened Sun's move to a sports team's offensive coordinator becoming head coach. "Jonathan's been the one calling the plays for some quarters now," he said.

McNealy will continue his active role at Sun. "In the next phase, he will be more actively involved with the customer base than he previously was," Schwartz said.

Schwartz now is CEO and president, and the chief operating officer role has been phased out. "I have no intention of having a COO," Schwartz said in an interview.

Rumors have swirled in recent weeks that McNealy would step down, with flames fanned by the return of Chief Financial Officer Mike Lehman and his declaration that he would "take a fresh look at everything."

More changes are coming as Lehman, Schwartz and McNealy evaluate Sun's options for the next fiscal year, which begins in July. But investors clamoring for major cost cuts through extensive layoffs will likely be disappointed, Schwartz said.

"The sentiment is that there needs to be, or will be, a significant 20 percent or plus work-force reduction," Toni Sacconaghi, an analyst at Sanford C. Bernstein, said on the conference call.

Schwartz's response was: "There's no plan whatever...of the cut you referenced."

McNealy said he'll be actively engaged in Santa Clara, Calif.-based Sun, including in his new role as chairman of its Sun Federal subsidiary, a role previously held by Clark Masters. And he looks fondly at his role in the industry.

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"Sun has been a labor of love for me for since 1982, and it has been an honor and privilege to serve as its CEO for the past 22 years. We've helped shape the industry as it is today, and the opportunities before us are immense. I look forward to a smooth transition and to working with Jonathan on company strategy in my continued role as chairman," McNealy said in a statement.

"Since joining Sun in 1996, Jonathan has been a driving force within the company," McNealy said, pointing to streamlining and major acquisitions.

But McNealy's departure is tied to Sun's recent rocky years, Pund-IT analyst Charles King suggested. "Given the continuing lackluster performance of the company over the last few years, unless he'd really been able to pull a rabbit...out of a hat, it was a foregone conclusion," he said. "When you manage a company in a public way like McNealy did, you become more of a target."

When Ed Zander left his joint role as Sun's president and chief operating officer in 2002, some called for a more buttoned-down replacement. But Schwartz has followed the same maverick path as McNealy. "Jonathan and I are highly aligned," McNealy said in the conference call.

Jonathan Schwartz

McNealy led the server and software company through the dot-com bubble, but it hasn't returned to consistent growth or profitability.

In recent months, there has been an outflow of top executives at Sun. Last month saw Masters, the company's government sales chief, announce plans to retire in June. Also in March, Sun's top software executive, John Loiacono, resigned to take a position at Adobe Systems. The month was also marked with the retirement of Bob MacRitchie, head of Sun's global sales.

Last year, Sun's then-chief financial officer, Stephen McGowan, announced plans to retire in October 2005. However, he has since agreed to stay on as an executive vice president of finance.

Market response
Shareholders apparently favored the news, pushing Sun's stock up 39 cents, or 8 percent, to $5.37 in after-hours trading.

Last year, for example, investors waged a proxy battle with the company, seeking to realign compensation for Sun executives. Some investors, complaining about an underperforming stock, sought an executive compensation plan that would rely on a stock option plan more closely tied to the company's performance, according to Sun's proxy filing last year.

For the past several years, Sun's stock has traded in the range of $3 to $4 a share and has underperformed competitors such as Dell and key indexes like the S&P 500.

Investors were particularly angered when Sun's board awarded McNealy a special bonus of $1.1 million, even though he had failed to qualify for a bonus under the regular compensation plan.

The company on Monday reported a third-quarter loss of $217 million amid a climb in revenue.

CNET News.com's Dawn Kawamoto and Tom Krazit contributed to this report.