AT&T Taking Step to Bolster Computer Line

Stake in Sun Microsystems Of Up to 20% Is Planned At Cost of $300 Million

By Michael W. Miller and Brenton R. Schlender, Staff Reporters
The Wall Street Journal

January 7, 1988

American Telephone & Telegraph Co. agreed to buy as much as 20% of Sun Microsystems Inc., the young Silicon Valley company that AT&T has tapped to help shore up its loss-ridden computer business.

The investment, which could total more than $300 million, is a big step in the telecommunications giant's broad effort to stay competitive as voice and data increasingly travel over the same electronic networks. The race to control those networks has shaped up as an intense battle between AT&T and International Business Machines Corp., which is fighting to become a bigger telecommunications player.

The move also gives a big dose of credibility to Sun, one of the computer industry's hottest newcomers, but one that hasn't yet shed its image as a brash adolescent company.

In national over-the-counter trading yesterday, Sun's stock rose $2.25, closing at $36.75, in very heavy trading. In New York Stock Exchange composite trading, AT&T closed at $28.25, down 25 cents.

The investment plans follow an important technology pact AT&T and Sun announced last fall, in which Sun agreed to help AT&T develop a new family of mid-range computers. The joint venture is an ambitious bid to create an industry standard for powerful computers out of AT&T's Unix operating system and a Sun microchip -- dubbed Sparc -- much the way Microsoft Corp.'s software and Intel Corp.'s chip have become personal-computing standards.

If successful, the bid would give AT&T the influence it needs in order to compete against IBM in computers. It also could provide Sun with the clout and riches that have made Microsoft and Intel enduring high-tech titans.

"We would redistribute the wealth in the industry," said Vittorio Cassoni, the chief of AT&T's computer operations.

AT&T offered to invest in Sun during the negotiations last year that preceded the technology agreement, according to Joseph A. Graziano, Sun's vice president, finance, and chief financial officer. But the companies couldn't hammer out an investment deal before the technology agreement was announced -- on Black Monday, Oct. 19.

In the ensuing talks, Sun insisted on investment terms that would let it benefit from a market recovery, said Mr. Graziano, who led Sun's negotiations.

In the end, AT&T agreed to buy as much as a 15% stake in Sun by purchasing newly issued shares at Sun's discretion in one or more private placements over the next three years. The price would be the average of Sun's closing price during a specified period of trading days, plus a 25% premium.

AT&T would buy the remaining 5% of Sun's shares in the open market. Based on yesterday's closing price, all the purchases would cost AT&T slightly more than $350 million.

Analysts expressed relief that AT&T is giving Sun such an important role in its computer business's future, rather than relying on its own beleaguered in-house team. "I'd rather see AT&T give Sun $300 million than have AT&T spend it internally," said Jack Grubman, a PaineWebber Inc. analyst.

"It gives AT&T a window into a company that has been as right in assessing every turn in the computer industry in the last five years as AT&T has been wrong," said Richard Shaffer, a New York technology consultant.

AT&T's computer business posted pretax operating losses of $1.2 billion in 1986, one of the deepest wells of red ink in the entire computer industry. An AT&T spokesman, without confirming that figure, said the company slashed its computer losses in 1987 to one-third the 1986 level.

Meanwhile five-year-old Sun, based in Mountain View, Calif., more than tripled its net income to $36.3 million, or $1.11 a share, in its latest fiscal year, which ended June 30. Sun makes workstations -- powerful personal computers designed for engineers and scientists who do complex graphics and computation work.

Another provision of Sun's agreement with AT&T will assure that AT&T can remain Sun's largest investor. AT&T said if another investor buys 20% to 40% of Sun, AT&T will have the right to buy the same amount. Sun's other big investors currently include Eastman Kodak Co., with a 4.5% stake, and New York money manager Jennison Associates, Sun's largest holder, with 6.3%.