Sun: Big Trouble in Santa Clara

Sun Microsystems' stock falters amid talk of internal upheaval and a possible CEO ouster
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Sun Microsystems'

(JAVA)

shares crept up in early trading Wednesday as investors

shrugged off

talk of boardroom battles and pay disputes linked to

IBM's

(IBM) - Get Report

troubled

acquisition attempt

.

The rally reverses a recent slump in the company's share price after IBM reportedly withdrew its offer to buy the struggling tech giant. Sun's stock rose 8 cents, or 1.27%, to $6.36 in early trading Wednesday, outpacing the Nasdaq, which gained 1.02%.

Although price was said to be the

major sticking point

in

negotiations

between the two firms, the

The New York Times

reports that other factors were also at play.

Sun's "change of control" contracts with its executives, senior engineers and managers, for example, were a source of tension with IBM, according to the newspaper. IBM, it said, felt that the payments were higher than it had anticipated, which led to a reduced offer.

The

Wall Street Journal

also reported a boardroom rift between Sun CEO Jonathan Schwartz and his chairman Scott McNealy. Schwartz is rumored to have favored a sale, whereas Sun co-founder McNealy is said to have opposed the deal.

Despite Sun issuing a statement saying that it stands by its leadership team, there is growing speculation that McNealy may now attempt to usurp Schwartz.

"Butting heads with Scott McNealy at Sun Microsystems is ill advised -- even if you are the CEO," wrote Miko Matsumura, deputy CTO of

Software AG

, in a blog entry Tuesday.

McNealy, who was Sun CEO until he stepped down for Schwartz in 2006, may now emulate Michael Dell, who returned as

Dell

(IBM) - Get Report

CEO in 2007, according to Matsumura.

"Mark my words, Schwartz is toast, IBM deal or no deal," he explained. "If the IBM deal fails completely (most likely outcome), look for Scott McNealy to pull a Michael Dell (or a Jerry Yang, depending on how you look at it) and to appoint himself CEO again."

Schwartz and McNealy certainly cut very different figures. The bespectacled, pony-tailed CEO often comes across as an über-geek and has a much more reserved style than his predecessor. This is a stark contrast to the opinionated, hockey-playing McNealy, who proudly lists his single-digit golf handicap on his company bio. During his 22 years as Sun Ceo, McNealy grew the company from a Silicon Valley startup to a global technology powerhouse with more than 37,000 employees.

"I think that the company internally is going through some challenges," said Vanessa Alvarez, an analyst at technology research firm Frost & Sullivan. "I think that, culturally, Sun wants to maintain its open-source, independent 'we can do anything' attitude, but it's not that anymore, they have become sort of a 'bureaucracy within.' "

Despite some good technology and a strong presence in open-source software, Sun has earned a reputation for under-performing and has been dogged with execution issues and losses in the last few years.

Whether the IBM deal happens or not, Frost & Sullivan's Alvarez thinks that Schwartz's days are numbered.

"When there's McNealy on one side and Schwartz on the other, I don't think it bodes well for Schwartz," she said. "I am pretty sure that we will see some sort of CEO ousting à la Yahoo's Jerry Yang."

The analyst, however, is concerned that Sun may have blown a

golden opportunity

when the IBM talks broke down.

Earlier discussions reportedly centered on a $6.5 billion price tag, although IBM is said to have

forced

the value of the deal down. Last week, news reports said that IBM would probably pay between $9 and $10 per share for Sun, down from a price of about $10 to $11 per share.

"It's unfortunate for Sun, because they should have taken the money and run," said Alvarez. "When you get a 100% premium in this environment, you don't get much better than that."

Sun did not respond to

TheStreet.com

's request for comment on this story.