High-tech rivals Microsoft and Sun Microsystems buried the hatchet Friday, announcing Microsoft would pay US$1.6 billion to settle antitrust and patent disputes.
The deal between the longtime bitter rivals came in conjunction with announcement of a broad 10-year agreement on technical cooperation which could help lift Sun out of its recent slump.
The peace deal marks a major shift in the tech landscape as Sun, a major maker of software and servers, has been one of Microsoft's fiercest critics and a force in the antitrust actions against Bill Gates' firm.
Under the settlement, Microsoft will pay US$700 million to resolve pending antitrust issues and US$900 million to resolve patent issues.
"Our customers said, `Stop the noise and start the collabor-ation,'" said Scott McNealy, chairman and chief executive officer of Sun at a news conference in San Francisco with Microsoft CEO Steve Ballmer.
"This is a good idea today, and it was a good idea 12 months ago," Ballmer said. "The fact is it presents a new opportunity to go out and work on things that are customer driven."
Separately, Microsoft will make an up-front royalty payment of US$350 million in a deal allowing for use of each other's technology and Sun will make payments when this technology is incorporated into its server products, the companies said.
The two firms agreed not to sue over past patent infringement claims and to start negotiations for a cross-license agreement.
The deal will mean the companies will work on "interoperability" between Sun's Solaris operating system for servers and Microsoft Windows.
Analyst Joe Wilcox at Jupiter Research said the deal, while surprising in light of the history of the two firms, makes sense for both.
"Microsoft is dead serious about settling every lawsuit possible," Wilcox said in an online commentary.
"Today's settlement with Sun is perhaps the best example to date, as the two companies are bitter rivals and have locked horns during several knockdown legal scuffles," Wilcox said.
Microsoft will avert a messy trial what could feature "digging up of past behavior Microsoft is trying to forget," Wilcox said.
Sun, which makes server software that competes against Windows server software, now "has access to broader Windows information and an agreement that would extend to other server software," he added.
But Wilcox said it was unclear whether Sun would now join Microsoft in lobbying the European Commission to drop its antitrust sanctions imposed last month.
The move comes as Sun is struggling with competition both from Microsoft and from the open operating system Linux -- and with its market capitalization a mere shadow of its 2000 self. Sun posted a net loss of US$125 million in its most recent quarter.
Sun said at the same time it will take a total of US$475 million in charges over the next several quarters as it trims 3,300 jobs.
The company warned that it now expects a third-quarter loss wider than expected, between US$750 million and US$810 million.
"We are resizing the company to better align our cost structure," McNealy said.
Sun shares surged nearly 21 percent on the news to US$5.06 while Microsoft rose better than 3 percent to US$25.85.
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