Sun absorbs $147M loss as Oracle deal looms

Sun Microsystems Inc. recorded a $147 million loss while sales eroded 31 percent in the April-June period, likely the server and software maker's last full quarter as an independent company.

Sun's latest numbers, reported Friday in a regulatory filing without the usual news release and conference call with analysts, highlight the uneven financial performance that forced the Santa Clara-based company to put itself up for sale.

In April Oracle Corp. outbid IBM Corp. and agreed to buy Sun in a $7.4 billion deal. It is scheduled to be completed this summer, and still needs approval from European antitrust regulators, which could come any day now.

The deal will give Oracle more control over development of the Java programming language, which Sun invented and is a key ingredient of the Internet. It also moves Redwood Shores-based Oracle, a business software maker, into the hardware market. Sun is one of the world's biggest sellers of computer servers, which power Web sites and corporate back offices.

Sun said after the market closed that it lost $147 million, or 20 cents per share, in the three months ended June 30, which is Sun's fiscal fourth quarter. That compares with a profit of $88 million, or 11 cents per share, in the year-ago period.

Excluding employee stock-based compensation and other expenses, Sun said its loss would have been 3 cents per share.

Sales in the latest period fell to $2.63 billion from $3.78 billion last year.

Revenue from server sales fell 36 percent over last year to $1.1 billion. Revenue from support services fell 15 percent to $886 million.

Analysts polled by Thomson Reuters expected a loss of 19 cents per share and sales of $2.37 billion.

For the full fiscal year, Sun lost $2.23 billion, versus a $403 million profit last year.

Sun's shares fell 2 cents to $9.32 in after-hours trading. The stock is still selling below the $9.50 per share that Oracle has agreed to pay for Sun, a sign that indicates some investors fear the deal might still be scuttled.

The latest results mean that Sun has lost $5.6 billion since 2002. It had only two profitable years — 2007 and 2008 — in that period.

eTelecare, Stream Global merging in stock-for-stock deal

AYALA Corp.’s BPO investment company, LiveIt Investments Ltd., has announced that its investee company EGS Corp., the indirect parent company of eTelecare Global Solutions Inc., has entered into a definitive agreement to combine with Stream Global Services Inc., (NYSE/Amex:OOO), in a stock-for-stock exchange.

In the process, a global BPO services company with nearly $1 billion in projected revenue in 2010, and about 30,000 employees, will be created.

The current Stream and EGS Corp. stockholders will own approximately 57.5 percent and 42.5 percent, respectively, of the combined entity. The boards of directors and principal stockholders of both Stream and EGS Corp. have unanimously approved the combination. They include Ares Management LLC and certain founding Stream stockholders representing 90.2 percent of the Stream’s outstanding shares, as well as LiveIt and Providence Equity Partners LLC, who together own 100 percent of EGS Corp.

The combination of Stream and eTelecare, which generated revenues of $523 million and $299 million respectively in 2008, will create a global BPO leader with 30,000 employees located in 50 solution centers in over 20 countries in North America, Europe, the Philippines, Latin America, India, the Middle East and Africa. The combined company, to operate under the Stream Global Services name globally, and under the eTelecare brand in the Philippines, will have a broadly diversified Fortune 1000 customer base, a very experienced executive team, and technical and product leadership across a wide range of industries, including the technology, retail, entertainment, media, telecommunications and financial service sectors. It will draw upon the service strengths of each business’s integrated service offerings, which range from revenue generation, to customer care and technical support, to warranty, email and chat services.

Fernando Zobel de Ayala, president of Ayala Corp., stated, “Ayala Corp. believes that the combination of a world-class company like Stream, with a Philippine leader like eTelecare, will create one of the largest and most competitive companies in the global BPO industry, which will be uniquely positioned to deliver a full range of market leading solutions to our clients. The combination also underscores our belief that the Philippines is playing an increasingly critical role in the outsourcing strategies of global clients, due to its many advantages, such as a large and high quality workforce and robust infrastructure.”

John Harris, president and chief executive officer of eTelecare, said, “This is a very exciting time in the evolution of eTelecare, and enables it to be able to deliver a truly global service offering to our clients. This combination fulfills our strategic vision of extending our delivery capability throughout North America, Europe, Asia, Latin America and Africa. The eTelecare team is extremely excited about joining Stream to create a leading global BPO company.”

Gilbert Santa Maria, who will continue to lead eTelecare’s Philippine operation, will play a pivotal role in the integration of the two companies’ operations in this market. The combined company will employ approximately 10,000 from eTelecare and 1,500 from Stream in the Philippines. Mr. Santa Maria said, “We are very positive about this combination, as it will strengthen our presence in the Philippines, and enhance our ability to achieve industry-leading service levels and operating efficiencies for our clients. It also means stronger revenue growth for our operations here, and as a result, more career opportunities for our people, and more jobs for the country.”

Alfredo Ayala, chairman of eTelecare and CEO of LiveIt, added that, “Stream is led by Scott Murray whom I have known for several years as a very well regarded leader in the BPO industry. He and his executives took over the leadership of Stream in the second half of last year, and have rapidly achieved excellent performance for their clients, as well as a near doubling of Ebitda in the first half of 2009. We and our partners at Providence are looking forward to working with Scott, his team and Ares, to create significant long-term value for our clients, employees and stockholders.”

Murray will continue to be chairman and CEO of the parent company, Stream Global Services, following the close of the combination. Alfredo Ayala will become the Non-Executive Vice Chairman of the Board of Directors of Stream Global Services and will remain the Non-Executive Chairman of the company’s Philippine entity. Of the 10 members on the new Board, Ares will appoint three directors and one independent director. Ayala and Providence will together also appoint three directors and one independent director. The remaining two directors will be Mr. Murray and a third independent director. Stream’s corporate headquarters will continue to be in the Boston area in Wellesley, MA following the closing. Ares, Ayala (through LiveIt) and Providence will own approximately 45.5 percent, 25.5 percent and 17.0 percent respectively, of the combined company. Mr. Murray will own approximately 5 percent of the combined company.

The transaction is subject to customary closing conditions, including the submission of an information statement with the Securities & Exchange Commission and normal regulatory approvals including clearance under the Hart-Scott-Rodino Antitrust Improvements Act. As the requisite majority of stockholders of each company have approved the issuance of shares in the combination of Stream with EGS Corp., the combination will not require further approvals of any other stockholders of either Stream or EGS Corp. The transaction is expected to close in September 2009.

About Stream Global Services:

Stream Global Services is a premium provider of customer care and business process outsourcing (BPO) services for the brand-driven Fortune 1000. A global firm, with more than 16,000 employees based out of 35 service centers in 20 countries, Stream is a trusted advisor to some of the largest technology, retail, entertainment/media, telecommunications and related companies in the world. Its service programs, including technical support, sales service, customer retention and revenue generation, are delivered through very disciplined processes used by a highly skilled workforce. Stream continues to expand its global presence and service offerings to increase brand loyalty, revenue and business performance for organizations across the globe. To learn more about the company and its complete service offerings, please visit www.stream.com.

About eTelecare:

eTelecare Global Solutions is a leading provider of business process outsourcing (BPO) services focusing on the complex, voice and non-voice based segment of customer care services. The company provides a wide range of services, including technical support, customer service, sales, customer retention, chat and email, from both onshore and offshore locations. Services are provided from delivery centers in the Philippines, United States, Nicaragua, and South Africa. Additional information is available at www.etelecare.com.

About Ares Management LLC.:

Ares Management is an SEC-registered investment adviser and alternative asset manager with total committed capital under management of approximately $29 billion as of June 2009. With complementary pools of capital in private equity, private debt and capital markets, Ares Management has the ability to invest across all levels of a company’s capital structure – from senior debt to common equity – in a variety of industries in a growing number of international markets. The Ares Private Equity Group has a proven track record of partnering with high quality, middle-market companies and creating value with its flexible capital such as Stream Global Services, Inc. Other notable current investments include General Nutrition Centers, Inc., Hanger Orthopedic Group, Inc. (NYSE: HGR) and Maidenform Brands, Inc. (NYSE: MFB). The firm is headquartered in Los Angeles with approximately 250 employees and professionals located across the United States and Europe. For more information, visit the Ares website at www.aresmgmt.com.

About Providence Equity Partners:

Providence Equity Partners is the leading global private equity firm specializing in equity investments in media, entertainment, communications and information companies around the world. The principals of Providence manage funds with approximately $22 billion in equity commitments and have invested in more than 100 companies operating in over 20 countries since the firm’s inception in 1989. Significant investments include Aditya Birla Telecom, Bresnan Broadband Holdings, Casema, Com Hem, Digiturk, Education Management Corporation, eircom, Freedom Communications, Hulu, Idea Cellular, Kabel Deutschland, Metro-Goldwyn-Mayer, NexTag, Ono, Open Solutions, PanAmSat, ProSiebenSat.1, Recoletos, TDC, Univision, VoiceStream Wireless, Warner Music Group, Western Wireless and Yankees Entertainment and Sports Network. Providence is headquartered in Providence, RI (USA) and has offices in New York, Los Angeles, London, Hong Kong and New Delhi. Additional information is available at www.provequity.com.

About Ayala Corporation:

Ayala was founded in 1834 and is the holding company of one of the largest and most diversified business groups in the Philippines, with interests in real estate, financial services, telecommunications, electronics, and information technology. LiveIt is its holding company in the BPO sector, with significant holdings in eTelecare, Integreon and Affinity Express. Additional information is available at www.ayala.com.ph.

Yahoo-Microsoft deal finally worked out (confirmed)

The story has had quite a volume of press since a few months ago when Microsoft's offer to buy out Yahoo! for $47.5 billion was turned down by then Yahoo CEO Yang.

A couple of weeks later, rumors about a different Yahoo-Microsoft deal came out. This time, it was only for the Yahoo's search business, and Microsoft's advertising arm. In this new deal, it was supposed that Microsoft will handle Yahoo's search engine, while Yahoo handles Microsoft's online advertising.

Just yesterday, however, a deal not very different from what was rumored was confirmed to have been struck between the two tech giants. The obvious drive behind this would be to take on search and targeted advertising giant Google. But the question of whether it's going to work remains.

The long-expected deal means Microsoft's new Bing search engine will be combined with Yahoo's experience attracting advertisers in the first serious threat to Google Inc -- if the companies get regulatory approval and can make the partnership work.

Yahoo shares fell 12 percent as some investors were disappointed by the limited scope of the deal, which did not include up-front payments for Yahoo. Some investors had expected up to $3 billion up-front, according to a Bernstein report.

"I would have preferred more money," said Ryan Jacob, chief investment officer of Jacob Asset Management, pointing to the lack of an upfront payment, as well as revenue-sharing and cost-savings terms that were not as high as he expected.

"There are risks on both sides. Big deals like this tend not to work out. It's a long-term deal that's going to take a long time to implement," said Jacob, whose $40 million fund holds some Yahoo shares. "It's better than no deal."

Microsoft shares closed up 1.4 percent, while Google shares fell 0.8 percent.

Yahoo estimated the deal would boost its annual operating income by about $500 million and yield capital expenditure savings of $200 million. Yahoo also expects the deal to boost annual operating cash flow by about $275 million.

Antitrust obstacle

Under the deal announced on Wednesday, Microsoft's Bing search engine will power search queries on Yahoo's sites. Yahoo's sales force will be responsible for selling premium search ads to big buyers for both companies.

The partnership poses only a theoretical challenge to Google at present. It could take two-and-a-half years to get approval and be fully implemented, according to Yahoo Chief Executive Carol Bartz, which would mean the partnership would not be fully effective until early 2012.

Microsoft and Yahoo still face antitrust and privacy issues. Google dropped a planned search partnership with Yahoo last year under pressure from the U.S. Justice Department.

But experts said the deal would likely get the go-ahead after examination by Obama administration antitrust officials since it would create a stronger rival to market leader Google.

Google said only that it was "interested" in the deal, while the chairman of the US Senate antitrust panel said it warrants "careful scrutiny."

Microsoft and Yahoo expected the deal to be "closely reviewed" by regulators, but they were "hopeful" it could close in early 2010.

The deal concludes a lengthy, and at times contentious, dance between the two companies. They have been in on-again, off-again talks since Yahoo rebuffed Microsoft's $47.5 billion takeover bid last year.

Microsoft CEO Steve Ballmer clashed last year with former Yahoo CEO Jerry Yang, who was strongly opposed to an all-out acquisition. Relations between the two companies improved under new Yahoo CEO Bartz, who took the reins in January and started to shake up Yahoo's management.

Ballmer and Bartz met "three or four times" over the past six months as they hammered out a deal, according to Ballmer.

How the deal works

While Bartz had previously said any deal would require a partner with "boatloads of money," she said on Wednesday the agreement provided "boatloads of value," adding the revenue- share agreement in the Microsoft deal was more valuable to Yahoo than a one-time payment.

"Having a big up-front cash payment doesn't really help us from an operating standpoint," Bartz said.

Microsoft's AdCenter technology will serve the standard sponsored links that appear alongside search results. Microsoft will pay Yahoo an initial rate of 88 percent of search revenue generated on Yahoo sites in the first five years.

That means Yahoo can concentrate on selling ads on its websites, while still generating revenue from search ads without the expense of maintaining its own search engine.

Bartz said the deal will result in "redundancies" in Yahoo's staff, although she declined to be specific. She stressed any changes would not occur until after full implementation of the partnership.

According to comScore, Google has a 65 percent share of the US search market, compared with Yahoo's 19.6 percent and Microsoft's 8.4 percent.

"Microsoft will be able to report a greater share in terms of search ... And Yahoo doesn't have to spend any more money on search," said Barry Diller, CEO of IAC/InterActiveCorp, which owns rival search engine Ask.com.

Yahoo shares closed down $2.08 at $15.14 on Nasdaq, while Microsoft closed up 33 cents at $23.80 and Google shares closed down $3.61 at $436.24.