Sun's largest investor lands two board seats

Update at 9:27 a.m. PST, with comments from a shareholder activist research firm.
Correction, 9:35 a.m. PST: This story initially had the incorrect day the agreement was announced. It is Monday.
Update at 1:33 p.m. PST, with closing stock price and excerpt from Southeastern podcast about its board seats.

Sun Microsystems and its largest investor announced an agreement on Monday that entitles the investor to nominate two directors to Sun's board, marking the latest action it has taken to right the struggling company.

Southeastern Asset Management, which holds a 22 percent stake in Sun, will nominate two directors, who will be subject to approval by the board. For Southeastern, this move marks yet another attempt by the company's largest shareholder to improve Sun's performance.

In October, Southeastern announced it not only upped its stake in Sun but also changed its status from a passive investor to an active investor, stating it wanted to maximize shareholder value by holding talks with Sun's management, as well as third parties. Sun's stock has fallen 83 percent from its 52-week high in December last year, while the tech-heavy Nasdaq is down by roughly half that level.

And in its most recently reported quarter, the company posted a $1.68 billion net loss and a 7 percent decline in revenue, while its traditional business of high- to mid-range servers running on Sparc processors took a hit.

In a statement, Jason Dunn, Southeastern's vice president and principal, said:

We fully support Sun's CEO Jonathan Schwartz, and his leadership team in their efforts to continue driving near-term efficiencies and long-term growth.

Sun product lines like Open Storage and Solaris-based Chip Multi-Threading systems along with software infrastructure assets including Java, OpenSolaris, and MySQL, illustrate Sun's enormous growth opportunity. With the appointment of two new directors, the recently announced restructuring, over $3 billion in cash and a long history of cash generation, we are confident Sun is well positioned for long-term success.

Dunn, in his podcast on the agreement, also said, "Southeastern adding two directors to (Sun's) board further strengthens our conviction that Sun will take maximum advantage of all its opportunities for customers and for shareholders.

Southeastern, despite its substantial size of $34 billion in assets under management, tends to wear a velvet glove when prompting change in its portfolio companies. In the last four years, the most aggressive action it has taken against one of its portfolio companies is to withhold its votes to re-elect directors at Telephone and Data Systems--a move that proxy solicitors say is equivalent to issuing a no vote of confidence for the directors in question.

Southeastern's agreement with Sun marks the first time the investment firm has gained board seats as a result of its shareholder activism, according to John Laide, a product manager at FactSet, which tracks shareholder activism.

Neither Southeastern nor Sun was immediately available for comment.

In a statement, regarding the agreement, Sun's CEO Jonathan Schwartz, said:

Southeastern is a knowledgeable partner and investor that has demonstrated great commitment to our long-term vision and success.

Bringing complementary world-class talent to our board community only helps Sun fuel new ideas, drive more innovation and accelerate business opportunities and focus.

According to the agreement, its provisions will terminate in the event of a sale of "substantially all of the company's assets, or a change in control."

Private equity players, however, say the chances of Sun being acquired are zero to none. They note the only best option for Sun is to reorganize and restructure its way out of its problems, a move that the company took last month, its second time for the year

Shares of Sun closed at $3.83, up about 10 percent, Monday.