McNealy Mouthed
Skates off into Sun set

1. Icing on the Cake

Sun Microsystems' ( SUNW) shining moment this week was short-lived.

Fans of the Santa Clara, Calif., server maker applauded late Monday when co-founder Scott McNealy announced his long-awaited decision to step aside as CEO.

"I think Jonathan is the right person to ride Sun forward on this next big wave," McNealy said of successor Jonathan Schwartz, a ponytailed longtime Sun executive. "The timing fit me to a T and it was my call," added McNealy.

The decision also fit Wall Street to a T. Sun rose to prominence during the 1990s boom, but has lost money by the bucketful since the tech bubble burst. Analysts have prodded the company to cut jobs by the thousands, a move McNealy has opposed.

But if Sun backers were counting on a decisive break with the McNealy era, Schwartz has other plans. "Realistically, we have been lockstep on a whole number of different issues, across the past four or five years especially," Schwartz said of McNealy on a conference call Monday.

That march is already proving painful for some investors. On Monday's call, Schwartz quickly brushed off one analyst's published projection that the company could cut 12,500 jobs. After spiking as high as 7% on Monday's CEO-change announcement, Sun shares gave back their gains Tuesday to close flat.

"What is going to differ between the two of us?" Schwartz said in response to one question Monday. "Scott plays hockey. I don't play hockey. Scott has a short haircut. And unless he pulls something out that mandates it as a part of my employment contract, I'm keeping my haircut."

We have a feeling, Sun, that's not the kind of haircut investors were worrying about.

Dumb-o-Meter score: 93. Just four days before he gave up the CEO post, McNealy dismissed a Wall Street Journal report that his resignation was imminent. "That rumor is about 22 years old and still chuggin," he wrote.

To view Colin Barr's video take on Sun's entry in Five Dumbest this week, click here .

2. Recount

UnitedHealth ( UNH) snapped back at its critics this week.

The Minnetonka, Minn., health insurer said Wednesday it would liberalize board-election rules and curtail executive stock-option grants. The company is struggling to silence mounting investor outrage over CEO William McGuire's $1.6 billion stock-option hoard.

UnitedHealth has been on the defensive since it said earlier this month it was looking into the timing of those stock-option grants. The Securities and Exchange Commission is probing the possibility that companies such as UnitedHealth and Vitesse ( VTSS) may have manipulated the grants' timing to make them more valuable. UnitedHealth shares have dropped 25% since the issue surfaced.

This week, big shareholder Calpers criticized UnitedHealth's disclosure of the stock-option grants, its failure to explain their timing and the sheer size of McGuire's haul. Calpers said it might withhold votes from some UnitedHealth board members.

Not so fast, McGuire replies in a letter to shareholders. He points out that a withhold vote on directors and compensation committee members James Johnson and Mary Mundinger could have grave consequences indeed.

"While the withhold vote can be considered 'symbolic' or a way to 'send a message,'" McGuire writes, "such votes have far greater significance for UnitedHealth Group's director nominees."

Why's that? McGuire explains that under UnitedHealth's increasingly progressive board guidelines, "any nominee for director who receives a greater number of votes 'withheld' from his or her election than votes 'for' such election shall promptly tender his or her resignation following certification of the shareholder vote."

So by voting against a director you can force them to resign?

No, no one would want that.

Dumb-o-Meter score: 91. McGuire doesn't seem to be getting the message here.

                                                                
No Lucidity From Lucent
No tells after Alcatel

3. Results Oriented

The future looks brighter than ever at Lucent ( LU) and Alcatel ( ALA).

This week, the merger partners posted their latest disappointing quarterly results. Lucent missed fiscal second-quarter revenue targets and cut its sales outlook for the second time this year. Alcatel said first-quarter earnings slid despite an 18% sales gain.

Not to worry, though. With a $13.4 billion merger of equals to plan, who cares about details like making money or expanding the business? Certainly not Lucent, which is so ready to party that it's dropping out of the forecasting game altogether.

"Given the pending merger with Alcatel, we are discontinuing our practice of providing specific annual guidance," Lucent finance chief John Kritzmacher said Tuesday. "We will continue to focus on improving our operational performance as we prepare for successful integration with our merger partner."

Maybe that's not such a bad idea. Lucent, after all, said this week that fiscal-2006 sales will drop from a year ago. Only six months back, the company was claiming improbably that sales would grow 5% or so this year.

In any case, the setbacks don't seem to trouble anyone at the top of the struggling companies. Lucent and Alcatel directors agreed this week to make it harder to get rid of either CEO-designate Pat Russo of Lucent or Chairman-elect Serge Tchuruk of Alcatel, the International Herald Tribune reports.

Russo, who has received tens of millions of dollars in compensation while watching Lucent stock drop more than 50% on her watch, seems to share the board's rosy view.

"I've always been a believer in having a job as long as I can produce results," said Russo.

Sorry, but results like this aren't going to keep anyone employed for long.

Dumb-o-Meter score: 88. Job security is job one for Russo, obviously.

                                                                
Down-to-Earth Satellite Company
XM pats self on back for disclosure

4. Making Waves

XM Satellite Radio ( XMSR) encountered some heavy static Thursday.

The Washington, D.C., pay-radio broadcaster posted another big quarterly loss and disclosed a federal probe of its marketing practices. Its shares dropped 5%.

The company says the Federal Trade Commission (FTC) has asked for information about free trials, rebates, telemarketing, billing and customer complaints. The inquiry revives long-standing concerns about how XM and rival Sirius (SIRI) count subscribers.

XM also says the Federal Communications Commission (FCC) found that one of its products wasn't in compliance with transmitter-emission standards, The Associated Press reports. The company says in a regulatory filing that it "is too early in the process to determine the significance, if any, of these matters to our business."

It's never too early for XM to blow its own horn, though. The company's take on the FTC probe, CEO Hugh Panero told analysts on a Thursday morning conference call, is that XM is "a good company."

How's that? Well, XM received the FTC letter Tuesday. Without naming any names, Panero hastened to add, "Some companies could have held this."

Yes, Hugh, complying with disclosure rules is quite a feather in your cap.

Dumb-o-Meter score: 82. "I would like to avoid having these kinds of letters show up two days before our earnings call, but that's the journey we're on right now," Panero said, the AP reports.

5. Offensive Defense

Merck's ( MRK) legal defense may have gotten a little too vigorous for its own good.

On Friday, a jury in Rio Grande City, Texas, found the company liable for the death of a 71-year-old man who had a fatal heart attack within a month of taking Vioxx, Merck's now infamous painkiller. Merck pulled Vioxx on Sept. 30, 2004, after research established a heart attack link, spurring the filing of more than 10,000 lawsuits. The $32 million award marked Merck's third loss in six Vioxx trials.

In closing statements, The Associated Press reports, Merck lawyer Richard Josephson reviewed the victim's history of heart disease, beginning with a quadruple bypass in 1989. He also noted the victim's smoking habit.

"He had every single risk factor that you can have," Josephson said of the late Leonel Garza. "The idea that Mr. Garza was in good health and only had a 1% chance of having a heart attack is science fiction."

Then, according to the AP, Josephson hammered home his point. "You'll see that Mr. Garza's time was up," he blathered to jurors.

The way things are going in the Vioxx case, we'll soon be saying the same of Merck.

Dumb-o-Meter score: 80. Of course, Merck has never engaged in any science fiction itself.

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