IBM leads race for Sun but gloom still hangs over fate of 6,000 jobs

IBM is heading a list of likely buyers of Sun Microsystems which has announced that 6,000 jobs are to be axed worldwide.

Sun is the world's fourth biggest manufacturer of servers – equipment that runs computer networks – but is regarded by analysts in the US as vulnerable to takeover unless it can quickly turn round its fortunes.

Its shares, which traded above $250 at the peak of the dotcom boom have been struggling to breach $5 in recent weeks. The fall has been so steep that the company's value has been less than its cash in the bank, suggesting that everything else in the company is worthless.

The company employs 33,000 worldwide including 900 at its plant in Linlithgow but has said it is too early to say where the axe will fall.

Its trading performance has weakened in recent months. In the April-to-June quarter, Sun's share of the $13.8bn server market fell from 13.4% to 11.8% on a year earlier and its revenue in the period also declined, while market leader IBM with 33.2%, Dell and Hewlett-Packard – its bigger rivals – all gained. All three are likely to cast an eye over Sun even though the company says it is not looking to sell up.

The company's servers and software were a key feature of the internet boom, but analysts say it never recovered from the meltdown that followed.

The decision to cut 18% of its global work force will help it offset the sales slump of its high-end servers. Sales of those machines were down 27% in the latest quarter as banks and other big customers went under or were unable to get loans to buy the servers. One source in Scotland said last week that it would be tough finding customers in the current climate.

Sun's US-based software chief, Rich Green, has resigned, as the company splits its software division into three new business groups.

Hugh Aitken, who heads the Linlithgow operation, is a former chairman of the lobby group Electronics Scotland, but he cancelled the company's membership once he stepped down.

Sun's restructuring will satisfy many investors and follows three other rounds of big layoffs in the past three years in which nearly 7,000 jobs were axed. Analysts say it gives Sun breathing room to improve its margins and try to return to profitability.

However, the knives are out and the latest setback has rekindled speculation of a possible spinoff or sale. Fujitsu, Hewlett-Packard, Dell or IBM are all potential suitors, with IBM said to be favourite, even though a merger with Sun would give it close to half the market and would have to satisfy monopolies authorities.

One US analyst, Rick Hanna of Morningstar, said Sun still has strong cash on the balance sheet, and is "not dead yet, but the patient is definitely on the respirator".

Sun argues the cuts are needed to keep it competitive in a depressed economy that has also seen cutbacks at healthier Silicon Valley companies, including Intel and Cisco Systems.

Restructuring the software division may help Sun focus on areas where it has seen the most growth. Open-source software is in high demand because of tightened spending budgets.

Sun's challenge is believed to be building up that side of the business enough to compensate for severe declines in sales of its most expensive and profitable servers.

Brent Bracelin, an analyst with Pacific Crest Securities, said the latest move "will definitely position the company for a return to profitability, but it's still probably a year away".

Former chief executive Scott McNealy relentlessly mocked Sun's rivals, especially Microsoft and Intel, claiming that Sun's own server operating system and server chips were superior. McNealy once referred to Microsoft's Steve Ballmer and Bill Gates as "Ballmer and Butthead". But once the decline set in Sun has been unable to bring it to a halt. The company was too late to latch onto a shift away from proprietary hardware and software, as the server industry warmed to free software and cheaper microprocessors based on a standard design.