icrosoft and Sun Microsystems announced a surprising armistice yesterday, ending years of public acrimony between Scott McNealy, Sun's chief executive and the leader of the anti-Microsoft camp in Silicon Valley, and the world's largest software company.
Under the agreement, Microsoft will pay Sun, its longtime rival, a total of $1.6 billion to settle Sun's private antitrust suit against Microsoft and to resolve patent claims. The pact also includes a 10-year commitment by the two companies to work closely together, share technology and license each other's intellectual property.
In a separate announcement yesterday, Sun said it would lay off 3,300 employees, or 9 percent of its work force. Sun also said that it would report a loss of $750 million to $810 million for the quarter ended in March. That is bigger than Wall Street had expected.
Far more significant than any element of the pact is the striking change of heart and the circumstances that pushed Sun and Microsoft toward a truce.
Sun, a technology pioneer whose business has struggled recently, has long been Microsoft's nemesis and was an instigator of the sweeping government antitrust cases against Microsoft in the United States and Europe.
Mr. McNealy has a well-earned reputation as Microsoft's most persistent and quotable antagonist. In the past, he routinely described Microsoft's software as an overly complex "hairball." He once referred to Microsoft's leaders, Steven A. Ballmer, the chief executive, and Bill Gates, the chairman and cofounder, as "Ballmer and Butthead."
His tone was very different yesterday during a joint press conference with Mr. Ballmer in San Francisco. The agreement, Mr. McNealy said, "puts peace on the table in a big way."
Mr. McNealy has often called Microsoft an unrepentant monopolist. But he said that the agreement reflected changing times and attitudes for both companies. "Maybe we've grown up, and maybe they've grown up," he said.
Neither Sun, based in Santa Clara, Calif., nor Microsoft, based in Redmond, Wash., has the swagger or arrogance it had a few years ago. Sun has suffered humbling setbacks in the marketplace, while Microsoft's main troubles have come in the courtroom. "There are weaknesses on both sides that have pushed Sun and Microsoft to finally compromise," said Michael Cusumano, a professor at the Massachusetts Institute of Technology's Sloan School of Management.
Shares of Sun rose 87 cents, or 20 percent, yesterday to close at $5.06. Shares of Microsoft gained 77 cents, or 3 percent, to close at $25.85.
The technology business is gradually beginning to pull out of the long slump that followed the Internet boom years. But both Mr. McNealy and Mr. Ballmer spoke of how much the balance of power in technology markets had shifted from suppliers to corporate customers. Those customers now use hardware and software from several suppliers, including Sun and Microsoft, in their corporate data centers. That fact has caused them to push suppliers to make sure their products work smoothly together, especially the two key software technologies for Internet-based computing: Java, which was created by Sun, and Microsoft's .Net.
The settlement talks between Sun and Microsoft began more than a year ago, with a telephone call from Mr. McNealy to Mr. Ballmer. Mr. McNealy explained that he called because corporate customers had steadily been telling him to "cut the rhetoric, Scott."
Mr. McNealy made the first step, but Mr. Ballmer had also heard similar concerns from customers. "We're in a new era of customer-driven competition," Mr. Ballmer said in an interview. "That will tone down the rhetoric."
Mr. McNealy, 49, and Mr. Ballmer, 48, are far from strangers. They knew each other growing up in the Detroit suburbs, they both attended Harvard University and later the Stanford University business school. "We're pretty good friends," Mr. McNealy said, though he added "We've had some rocky moments."
After years of animosity, the negotiations between the rivals went slowly at first. "We had to rebuild — between our two companies, not just between Scott and I — a level of trust," Mr. Ballmer said.
The fence-mending included a few rounds of golf Mr. McNealy played with Mr. Ballmer, which Mr. McNealy doubtless found reassuring. He is one of corporate America's best golfers.
