Ballmer and McNealy, buddies once again

SAN FRANCISCO - When Sun Microsystems Inc. Chairman and Chief Executive Officer (CEO) Scott McNealy and Microsoft Corp. CEO Steve Ballmer exchanged Detroit Red Wings ice hockey jerseys on stage Friday morning, they brought two of the industry's most visible adversaries together in a landmark long-term partnership.

"I know a lot of you think this is kind of weird, he and I up here," McNealy said as he and Ballmer sat down next to each other on director's chairs in a conference room at a San Francisco hotel. But after years of fighting, McNealy said that at the behest of customers who told him to "cut the rhetoric and get interoperable," he picked up the phone and called Ballmer in early 2003 to settle the differences between Sun and Microsoft.

It took the companies about a year to come to an agreement. It is "complicated stuff," Ballmer said. "And we needed to rebuild between the companies -- not just between Scott and I -- a level of trust," he said. "In an environment that is litigious, it is hard to have open discussions."

"Everybody has to get comfortable with what they are willing to share," Ballmer said, talking about the technology sharing that Sun and Microsoft agreed on in the end.

The companies were close to a deal in December, but there was a need for a little more "creativity," Ballmer said. Sun and Microsoft took a break from the negotiations in late December and Microsoft last month was distracted by the European Commission's antitrust decision against the company, Ballmer said.

Most of the talks leading up to the agreement were done over the phone, but company executives did meet in person. McNealy started the discussions by inviting Ballmer to play a game of golf. They teamed up against another pair of players -- whom they didn't name -- and met at a course where they could play in private. Ballmer and McNealy lost, they said. At later stages, meetings were held at Microsoft's campus and at McNealy's house.

On a July day last year, during a week when Sun was closed, Ballmer and Microsoft Chairman and Chief Software Architect Bill Gates were at Sun's headquarters in Santa Clara, California. At one point, Gates took a restroom break and wandered unescorted into the halls of Sun's inner sanctum. There he ran into a Sun worker with a dog, McNealy said.

"I think he just walked by thinking, 'man that guy looked liked Bill,'" McNealy said.

The result of frequent meetings between Sun and Microsoft and, in the last few months, weekly phone calls, was a broad agreement reached early Friday morning, resolving antitrust and patent issues as well as establishing a framework for the companies to share technical information without infringing on each other's intellectual property.

As part of the deal, Microsoft will pay Sun $1.95 billion, of which $700 million is to settle Sun's antitrust case against Microsoft, $900 million is to clear up patent disputes and $350 million is to license Sun technology, Microsoft and Sun said. The deal is not about the Microsoft payments, but about business opportunity, Ballmer and McNealy stressed. Both Sun and Microsoft expect significant revenue to result from their collaboration, they said.