The Quarter, KKR, etc.
What a week... after a slew of investor and customer calls, I thought I'd jot down a few comments and reactions. As you know, we announced our Q2 results last Tuesday, along with an investment by KKR - preceded by Monday's announcement with Intel. So we've been pretty busy - and lest some of the questions I've heard go unanswered, here's a quick overview.
1. What did you think about the quarter?
As I said yesterday, I'm satisfied with the team's performance. Now, what I said to folks internally was that I was "freaking over the moon with our progress," but our investor relations team said the financial community might have a hard time parsing that (PR said my Mum might be upset, as well), so we scaled it back to a more dignified, "I'm satisfied with the team's performance."
Honestly, it was a good quarter, we over achieved many of our internal objectives, and the strategic announcements drove a ton of awareness and momentum. Which are now rippling across the globe. If I haven't recommended it before, I'll do so now - the Tipping Point is a good airplane read.
2. Now, what's up with KKR?
For those that don't know who KKR are, they're a (very) large private investor, one of the smartest and most successful in the history of investing. They're less well known outside of financial circles, but their track record is one notch above stellar.
3. Why did you want them investing in Sun?
First, their investment is a big endorsement - they clearly see our potential. Second, we wanted their wisdom, perspective, access to their portfolio companies, engagement from some incredibly smart people - frankly, we didn't see a downside. And in terms of the financial transaction, here's a crude summary: (and as a caveat, this is a crude summary - if you want the exact details, please refer to this filing with our friends at the SEC.)
They loan us money at an extremely low interest rate, in exchange for the right to buy our shares if they rise above 25% of their original price. It's called "a convertible."
4. Do you need the money?
Heavens, no. With more than $4 billion in cash prior to the deal, one of the strongest balance sheets of any technology company, we didn't need the money.
5. If you didn't need the money, why are you raising it?
Because you raise money when it's cheap, and when you don't need it. Trust me, I've raised money when I needed it, I'm not doing that again. We have one of the strongest balance sheets on the planet, with $4.8b in cash and marketable debt securities prior to the deal. That opens a world of opportunity.
6. Are you going private?
No.
7. Are you going on an acquisition binge?
We're interested in growing the value of Sun. I'm neutral on how we achieve the best returns - organically or inorganically. But growth and volume = operating leverage.
8. Are they a hostile investor?
Absolutely not, I and the board want them involved - they're incredibly good at what they do, which is generate value for shareholders. To make that point clear to everyone, they signed a standstill agreement agreeing not to purchase more than a small amount of the company.
9. Aren't they just a short term investor?
Try this on for size - KKR's average holding period for the companies in which they invest is seven years. Seven. As the CEO of any other public company will tell you, they'd love it if *every* investor behaved like KKR. Other than Scott, I'm not sure we've had any other significant investor hold for that period of time. What drives CEO's and CFO's nuts are folks who hold the stock for 7 minutes. As one of the most highly traded stocks on Wall Street, we have a lot of those types of investors. So it's good to have stability in the investor base.
10. What other value do they bring?
First, as noted above, they have a portfolio of companies in which they're significant investors - take a look at the list, and tell me if having an introduction from KKR might be helpful. Second, we invited (yes, invited - early on, we said it was a precondition of their involvement) one of their members to join our board - stay tuned on that. We're hoping that'll bring a ton of insight and expertise to the team.
And finally,
11. Is it true James Gosling threw a spontaneous celebration (known locally as a beer bust) in Menlo Park, CA last Friday?
I'm sorry, that's confidential information, and I can neither confirm nor deny the rumor. But if we had, it would've been the first in... well, years. Such festivities might even ripple (in their appropriate cultural equivalent) across the globe.
Posted on 11:03AM Jan 30, 2007 | Comments[21]
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Posted by Gil on January 30, 2007 at 11:32 AM PST #
Posted by Joerg Moellenkamp on January 30, 2007 at 11:39 AM PST #
Posted by Charles R Martin on January 30, 2007 at 12:24 PM PST #
Posted by Chris Rondot on January 30, 2007 at 01:48 PM PST #
Posted by Anantha on January 30, 2007 at 02:18 PM PST #
Posted by Sam Morris on January 30, 2007 at 03:18 PM PST #
Posted by Peter on January 30, 2007 at 03:41 PM PST #
Posted by SKI on January 30, 2007 at 03:51 PM PST #
Maybe it's just my limited understanding of those filings that sees KKR as free to have someone serve on Sun's board or not, free to transfer the notes a few months after such a person leaves Sun's board (and no restriction to shorting, unless that were implied by "the Company's stock trading policies"?), which is all rather less binding than a "precondition of their involvement" (even assuming KKR is not into the shorting game). Now, as to the real cost of that supposedly "extremely low interest rate", there's this little "Item 8.01. Other Events", which I have not seen analysed elsewhere, which seems to bring the interest rate to roughly 0.70+(1/7 for a fee to KKR in Item 1.01)+(102.9+125.4-66.5-79)/700/7.25*100 or about 2.4% annually, and warrants to KKR by way of Credit Suisse with the same expiry dates and with strike prices around 10 USD (now you see the dilution countered, now you don't).
Here's hoping that Sun knows what it's doing, and that shareholders will benefit from the value derived from KKR's involvement commensurate with their preferential treatment.
Posted by RJS on January 31, 2007 at 03:46 AM PST #
No matter, because we get the "over the moon" part and agree wholeheartedly.
Posted by anonymous coward on January 31, 2007 at 07:03 AM PST #
Posted by Daniel on January 31, 2007 at 12:22 PM PST #
Posted by Dennis Clarke on January 31, 2007 at 01:59 PM PST #
Posted by ASharma on January 31, 2007 at 02:51 PM PST #
Posted by John on January 31, 2007 at 03:54 PM PST #
Posted by P Firmstone on February 01, 2007 at 04:04 AM PST #
Posted by Paul Sears on February 01, 2007 at 05:37 AM PST #
Posted by GANEX on February 01, 2007 at 06:00 AM PST #
* this is a good and legal white-knight move to prevent hostile take-overs. KKR is known for its long-term investment there is a gentlemen agreement among Private Equity firms not to interfere with each other's investments. After SUNW's poison-pill measures where removed last year, this is also a good way to make Sun more expensive to hostile takeovers.
* The convertibles are due in 2011 with a price of $7.x. KKR has high internal rate of return, and at less than 1% interest rate on the loans, this signals that KKR expect SUNW to appreciate considerably. If one were to use a very conservative IRR of 15% CAGR, this would be a double ($12-ish)by 2011. Of course PE firms expect IRR between 25% ~ 50% annually.
* Lastly, if you look at Sun's early VC company, Kleiner Perkins, way back in the late nineties, they helped to promote Sun's Servers to all the dot-coms which KPCB invested in. I hope with a board-seat, KKR can also do the same.
raytoei
(who does not own any position in SUNW but has a tonne of options at $19 ~ $50)
Posted by raytoei on February 01, 2007 at 06:28 AM PST #
The first blog that I'd like to present you is Jonathan Schwartz's blog, SUN'S CEO. Why? According to Mariano Amartino, author of the chronicle, Weblog sobre weblogs, in the newspaper, Clarín, it is one of best corporate blogs than he has ever met until now. He also underlines a comment read on the Schwartz's blog: “A CEO who blogs is rare. A CEO who publicly admits a mistake is priceless.” … but a CEO like Schwartz and his “transparency” is unique.
I must admit that I am really impressed by this blog. It is not flashy without being monotonous. You can read in eleven different languages while being very correctly translated. At least, for the french, spanish and portuguese versions, we are miles away from the automatic translations of search engines like Google.
I would place it in the categories 1-3-4-7 presented in the first note of this blog. I am sorry for the other CEO's blogs that we will visit, but as I like to say: we start with the best, too bad for the rest.
Well keep up the good work. Saludos de la Argentina
Posted by Eric Gagne on February 01, 2007 at 11:38 AM PST #
Posted by Jimmy L. on February 01, 2007 at 01:22 PM PST #
Posted by SUNW Private Investor on February 06, 2007 at 04:44 AM PST #