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Sun Microsystems To Cut Up To 6,000 Employees, 18% Of Work Force

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SAN FRANCISCO - Sun Microsystems Inc. plans to cut up to 6,000 jobs, or 18 percent of its global work force, as sales of its high-end computer servers have collapsed.

The drastic move announced Friday highlights Sun's desperation to cut costs and survive as an independent company. Sun's shares have fallen so steeply they've crossed an ominous threshold, driving the company's market value below its cash on hand.

That means investors believe the company itself is essentially worthless. After eight years of devastating financial problems and multiple attempts at restructuring, Sun's latest woes have ramped up speculation that one of the most storied names in computing could be snapped up dirt-cheap by a bigger rival. Hewlett-Packard Co., IBM Corp., and Dell Inc. are all possible suitors.

"The magnitude of the work force reduction is certainly overdue," said Brent Bracelin, an analyst with Pacific Crest Securities.

Bracelin said the move puts Sun in a better position to return to profitability, but added that the company is facing hard questions about a possible sale or spinning off parts of the business.

Sun shares fell 2 cents to $4.06 in midday trading Friday.

The Santa Clara, Calif.-based company said the job cuts will include between 5,000 and 6,000 of its 33,000 employees over the next year. The cuts should save an estimated $700 million to $800 million annually.

Sun expects charges of $500 million to $600 million spread out over the next 12 months to pay severance and other restructuring costs.

Sun also said its software chief, Rich Green, has resigned, as the company splits its software division into three new business groups. One will handle Sun's Java programming language and open-source database offerings. Another will be responsible for Sun's Solaris operating system, which is used to run servers. The third will focus on developing programs for "cloud computing" services delivered over the Internet.

"These are hard but necessary changes," Jonathan Schwartz, Sun's chief executive, said in an interview.

He said the company has been deeply wounded by the credit crunch, because customers can't get loans to buy expensive servers. A quarter of the Sun's business comes from the ailing financial services sector.

Schwartz said the restructuring of the software division reflects the company's increased focus on open-source software, whose underlying code is available for free. Sun's strategy, which some analysts believe isn't paying off as promised, is to sell support services for that software.

Schwartz said he's pleased with the company's process in picking up new customers through its software offerings.

The company's problem is "isolated to a single line item": sales of its high-end servers, which fell 27 percent in the latest quarter to $576 million. That's a staggering shortfall for a division that contributes a quarter of Sun's overall revenue. Sun's sales last year were nearly $14 billion.

"Across the board we feel great about our direction," Schwartz said.

Breaking up the business units also serves another purpose: it packages them nicely for possible spinoffs or sale, analysts said.

Sun's share price gives the company a market value of roughly $3 billion. Yet at the end of September, Sun had $3.1 billion in cash on hand. The gap indicates extreme pessimism about the company's prospects.

Sun posted a loss of $1.7 billion in the latest quarter, largely because it wrote down the value of the business by $1.45 billion.

At the height of the dot-com boom, Sun's stock price, adjusting for splits since then, topped $250 per share. The company was riding strong sales to Web startups and boasted that its servers "put the dot in dot-com," a catch phrase that became a punch line after the meltdown when Sun's sales shriveled.

The company has done several rounds of big layoffs in the last three years. Sun has cut 2,700 jobs since August of last year in two separate restructurings. The company had previously cut about 4,000 jobs after Schwartz took over as CEO from co-founder Scott McNealy in 2006.