AT&T; to Acquire Up to 20% Stake in Sun Microsystems : Deal Gives Computer Maker Means to Expand Production

American Telephone & Telegraph Co. said Wednesday that over the next three years it plans to buy up to 20% of Sun Microsystems, one of Silicon Valley’s most promising computer makers.

The deal was immediately praised by analysts as a convenient source of expansion money for Sun. Analysts also said the agreement would give the fast-growing Mountain View company a chance to solidify its position as the No. 1 maker of computer workstations, the powerful machines used by scientists, engineers, financial analysts and, increasingly, office workers.

For AT&T;, analysts said, the deal represents a strong investment opportunity as well as a chance for the telecommunications giant to improve its lagging performance in the computer business. At Sun’s recent stock prices, AT&T; would pay about $300 million for the investment.

Terms of the deal limit AT&T;’s stake in Sun to 20% for the next 10 years, unless Sun agrees to a change, and were designed to prevent an unwanted takeover.

Their Second Deal

“The structure of this agreement will enable Sun to remain independent and aggressive in the market with the added financial security,” said Scott McNealy, Sun president and chief executive, in a prepared statement.

Sun’s stock, traded over-the-counter, closed Wednesday at $36.75, up $2.25. AT&T; was off 25 cents, closing at $28.25.

The deal is the second major agreement between the companies in the last three months. In October, the companies said they would begin working together to develop a new computer design using technology from both companies.

The project, intended to create a powerful new computer standard for the workstation market, would combine a computer chip developed by Sun with an updated version of AT&T;’s Unix, the software program that controls the internal operations of computers.

In separate interviews Wednesday, officials from both companies said the latest agreement will ensure that Sun will have enough money to continue working on the project and still finance its explosive growth.

Faces Tough Competition

“The investment strengthens our existing relationship in the eyes of the business community and our potential customers,” said Robert Holder, director of business development for AT&T;’s Data Systems Group. “Our joint prospects are enhanced by adding this kind of credibility to that agreement.”

Since being founded six years ago by four 27-year-old graduates of Stanford University and the University of California, Berkeley, Sun has grown into a 5,300-employee operation with annual sales that analysts project could hit $900 million in its current fiscal year. For the fiscal year ended June 30, sales were $538 million.

McNealy said Sun is growing so quickly that it needed to raise additional capital, and the deal with AT&T; is “by far the most attractive option with the greatest potential benefit to Sun and its stockholders.”

But, even with the financing, Sun faces powerful competition and a stiff fight to keep its large share of the $2.1-billion workstation market. Sun’s chief competitor these days is Apollo Computer, a Chelmsford, Mass., manufacturer that was the leader in the market until it was eclipsed by Sun last spring.

In addition, Hewlett-Packard, Digital Equipment Corp. and increasingly, IBM, are fighting for a share of the workstation market, which is expected to grow at about 30% a year through 1991.

“The agreement with AT&T; solidifies Sun’s ability to stay No. 1 in workstations,” said Donald Wampach, an analyst with Oberweis Securities.

The deal calls for AT&T; to purchase newly issued common stock equal to 15% of Sun’s outstanding shares in installments over three years. AT&T; has agreed to pay a 25% premium over the prevailing market price for those shares. In addition, AT&T; is allowed to buy an additional 5% stake in Sun in the open market.

The agreement gives AT&T; a seat on Sun’s board and AT&T; said it plans to fill it with Vittorio Cassoni, president of AT&T;’s newly formed Data Systems Group.

SUN MICROSYSTEMS AT A GLANCE

Sun Microsystems, based in Mountain View, Calif., is a leading supplier of computer workstations for the engineering, scientific and technical markets. Its rapid growth has been spurred largely by the booming market for workstations.

Year ended June 30, 1987 1986 1985 (millions) $538 $210 $115 (millions) 36.3 11.9 8.5

Assets $561 million

Employees 5,300

Shares outstanding 38.3 million

12-month price range $22.00-$45.75

Book value $259 million

Wed. close (OTC) $36.75, up $2.25