Updated from Jan. 23

Shares of Sun Microsystems ( SUNW) surged 7% early Wednesday after the struggling tech company scored a $700 million private placement from private equity firm Kohlberg Kravis Roberts.

Sun said the investment will take the form of $350 million of convertible senior notes due in 2012, and $350 million of convertible senior notes due 2014. The notes will be convertible, at the holder's option during specified periods, at a price of $7.21 a share.

KKR will also nominate a member to Sun's board of directors when the transaction is complete.

On a conference call with financial analysts after the bell, Sun CEO Jonathan Schwartz said the company planned to "use the proceeds to pursue strategic opportunities for growth."

"We certainly don't need the money," he said. "It's an opportunistic transaction."

Schwartz said the deal will help raise awareness of the company in the financial services community.

Sun said it will use a portion of the offering proceeds to fund convertible note hedge transactions which it entered into with the private placement transaction. These transactions are intended to offset the dilution to Sun's common stock resulting from potential future conversion of the notes, the company said.

For its second quarter, Sun said it made $126 million, or 3 cents a share, compared with a loss of $223 million, or 7 cents a share, a year ago.

Sun's net income included $58 million in stock-based compensation charges, $26 million in restructuring and related impairment of assets and a tax benefit of $4 million.

Revenue hit $3.57 billion, up from $3.34 billion in the year-ago quarter.

Analysts polled by Thomson First Call had expected the server and software firm to make a penny a share on sales of $3.52 billion. Analysts' EPS estimates weren't comparable.

Gross margin for the second quarter was 45.2%.

Looking ahead, CFO Mike Lehman said the March quarter will be "seasonally challenging" and he forecast a sequential decline in revenue of 3% to 5%, which represents a range of $3.39 billion to $3.46 billion.

Thomson First Call analysts polled expect Sun to post $3.32 billion in sales for the fiscal third quarter.

Gross margin will range from 42% to 44%, Lehman said.

The turnaround added to Monday's news that the company will begin using Intel's ( INTC) Xeon microprocessors in some if its servers and workstations.

The partnership with Intel will help boost Sun's Solaris operating system and its new line of servers featuring x86 chips. Intel said it will also provide research and development so Sun's software can easily run on Intel hardware and promote Solaris through its sales channels.

The move is not about replacing microprocessors, Schwartz said on the call, but about getting access to markets and growing the business.

"The steady increase in adoption of our key developer platforms, the outstanding performance of our systems group, coupled with yesterday's endorsement of Solaris by Intel and today's landmark investment by KKR Private Equity Investors, L.P., are all validation of our momentum, and key drivers behind our push towards sustained growth and profitability," Schwartz said in a statement.

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