Image: Scott McNealy
Justin Sullivan  /  Getty Images file
Scott McNealy will stay on as chairman of the board, Sun said in a statement.
updated 4/25/2006 12:10:09 PM ET 2006-04-25T16:10:09

Scott McNealy, the often acerbic co-founder of Sun Microsystems Inc. and one of Microsoft Corp.’s most vocal critics, stepped down as CEO after 22 years Monday as the pioneering maker of computer servers reported a wider quarterly loss.

Jonathan Schwartz, Sun’s president, will retain his current position and take over as chief executive, while McNealy will remain chairman and a full-time employee of Santa Clara-based company.

“This isn’t about me. It’s about a big moment in Sun’s history and I’m proud to share that with you,” McNealy said on a conference call. “There’s lots more work to do and I’m certainly going to stay around and support that.”

Sun’s shares surged nearly 9 percent after the announcement of McNealy’s exit and the $217 million loss that met Wall Street expectations.

McNealy’s mantra “The network is the computer” helped Sun grow into one of the dominant providers of large computer servers that sell for tens of millions of dollars apiece. Following the collapse of the Internet bubble in 2000, he saw revenue decline and frequently came under pressure for not cutting costs enough.

He also frequently picked fights with competitors, calling Microsoft’s Windows operating system a “hairball” and its Outlook e-mail program “Look out” after a spate of costly viruses targeted it as a means of spreading.

Microsoft and Sun also sparred in court.

In 1997, Sun sued Microsoft in federal court over a licensing agreement for Sun’s Java universal programming language. Sun claimed Microsoft tried to prevent Java’s adoption on competing operating systems by adding enhancements for Windows-based computers.

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Sun lawyers also played a part in the Justice Department’s antitrust suit against Microsoft. After a federal judge in Washington ruled the Redmond, Wash.-based software maker illegally used its monopoly power illegally, Sun filed its own antitrust complaint.

The two companies settled the case in 2004 for $1.6 billion.

McNealy co-founded Sun Microsystems in 1982, developing it into a scrappy Silicon Valley startup whose high-powered computers, called workstations, became a major staple with engineers and businesses.

In 1996, after Microsoft products began encroaching on Sun’s territory, McNealy reinvented the company as a maker of servers, which performed the same tasks as mainframe computers for a fraction of the cost.

The move put a major crimp in key revenue generator for IBM Corp. Sun’s servers, which came about just as the Internet was morphing from an academic hobby to a mass communication platform, also helped speed the transformation.

“He was an instrumental part of making the Internet happen,” said Rob Enderle, principal analyst with the Enderle group. “When your on the Web and doing shopping, say a little prayer for Scott because he’s part of what got you there.”

McNealy, 51, and Sun harken back to an earlier era of Silicon Valley, when companies were run by their swashbuckling founders. With Apple Computer Inc. and Oracle Corp. as exceptions, company founders these days typically make room for more experienced leaders, as was the case with Google Inc. and Yahoo Inc.

Over the past five years, McNealy’s relationship with some Wall Street analysts grew strained as they criticized him for failing to adapt to a changing market place. Sun, for instance, has continued to make its own UltraSparc processor even as lower priced Intel Corp. chips tackle many of the same chores.

Schwartz, 41, joined Sun in 1996 with its acquisition of Lighthouse Design Ltd., a 35-employee outfit he founded to make software for Steve Jobs’s NeXT computer. He holds a bachelor’s degree in mathematics and economics from Wesleyan University in 1987.

He said he will spend the next 90 days performing a comprehensive review of the company with the help of Mike Lehman, who rejoined Sun as chief financial officer in February after holding that position between 1998 and 2002.

Schwartz said he had no immediate plans to change Sun’s strategy, although he declined to say if he planned further job cuts or other restructuring. Sun has about 38,000 employees.

On Monday, Sun posted a wider fiscal third-quarter loss, as costs for acquisitions, stock-based compensation and restructuring chipped away at higher revenue.

The net loss for the three months ending March 26 was $217 million, or 6 cents a share, compared with $28 million, or 1 cent, in the same period last year. Revenue grew 5 percent to $3.18 billion from $2.63 billion, as recent acquisitions boosted sales.

The loss met Wall Street expectations. Analysts were expecting the company to post a loss of 6 cents per share on sales of $3.2 billion, according to a survey by Thomson Financial.

News of McNealy’s departure and the company’s results were announced after financial markets closed. Earlier, Sun shares closed 5 cents higher to $4.98 on the Nasdaq Stock Market. In extended-session trading, they gained 44 cents, or 8.8 percent.

In the past 52 weeks, Sun shares have traded between $3.42 and $5.40. During the dot-com boom, its shares traded as high as $60.

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