Mergers, Acquisitions and Financial Results

The CEO of hardware and software company Sun Microsystems is being asked to approve an empowerment policy likely to see it sell 30% of its South African branch to black investors.

Few hi-tech multinationals have sold any local equity to black partners, but customers had made it clear that was what they expected, said Crawford Beveridge, its vice-president for Europe.

Beveridge is in SA this week to meet government officials, local staff and key customers to better understand the need for empowerment and exactly what it should entail.

While it was not a foregone conclusion that CEO Jonathan Schwartz would agree to selling equity, other options of forming a joint venture or working through franchises would be second best, said Beveridge.

"I will tell them the status quo isn't going to work. We want to be fully compliant and everyone I have spoken to says there has to be some black ownership."

Sun's director for sub-Saharan Africa, Vito Bonafede, had done a good job in complying with most of the requirements, said Beveridge, but a decision on equity had to come from the highest echelon.

The move is a change of attitude by Sun, which along with most multinationals seemed likely to opt for the "equity equivalent" thrashed out in the painful process of drafting an empowerment charter for the hi-tech sector. However, the equity equivalents may prove so onerous that selling shares is a more sensible and easier option.

The charter for the information and communications technology (ICT) sector expects companies to be 30% black-owned, or to have at least R7,5bn of their equity in black hands. Yet many of the multinationals that make up 48,9% of SA's IT sector complain that they cannot sell shares in a subsidiary because of their corporate structures.

A compromise was reached so any company able to prove that selling equity would inflict commercial harm could apply for exemption. It could make up the lost points by partnering black businesses to conduct joint research and development, run local manufacturing plants, or jointly invest in SA or in global markets. It could also set up a venture capital fund to invest in black companies, but it would be a full-time job looking for entrepreneurs to support, mentoring them and managing the cash.

"Many companies are talking about equity equivalents but I'm very sceptical," said Beveridge.

Sun believes share sales can be done -- if the company actually wants to. Problems will include calculating the value of a subsidiary and finding partners able to afford such a hefty stake, and who are able to enhance the business rather than passively hold its shares, or attempt to steer it in a way the global parent does not support.

Sun may also find potential partners try to bargain down its value, as the company is losing money. It suffered a net loss of $301m for the fourth quarter of financial 2006 on revenue of $3,8bn, up 29% from $2,9bn in the fourth quarter of last year.

Sun went through painful years when its products lagged behind the technology curve. It shed 12,000 staff, but invested in research and development to bring its products back to world-class standards.

Another 4,000 staff had been ditched, and profits were now on the horizon, Beveridge said.

Its business in SA accounts for about 1% of its revenue, and Bonafede said it had enjoyed "exceptionally good growth" in the past two years. "We are gaining market share for our servers, storage and identity management products, so business has been incredibly healthy."

Despite a recent spurt from hi-tech companies to sign up black partners, Bonafede said it was not too late to find a good investor. "There are some fantastic black business people out there who are not necessarily in the IT market who could be very good partners."

The ICT charter has stalled until government promulgates its codes of empowerment practice.

Business Day