SGI asset sale completes unraveling of Silicon Valley icon

Bankruptcy filing, $25M deal with Rackable leave longtime Silicon Graphics users in limbo

The assets of Silicon Graphics Inc. are being sold to Rackable Systems Inc. for $25 million, which is pocket change by Silicon Valley standards. The deal, announced April 1, is a difficult turn for a company that was founded the same year as Sun Microsystems Inc., in 1982.

That year, Apple Computer Inc. (as Apple was known at the time) was only six years old, and Oracle Corp. just five. It was a time when the Valley was really taking off as a high-tech hotbed, and SGI had as much potential — and early success — as vendors like Sun did. The company's revenue peaked at $3.66 billion in its 1997 fiscal year, and the maker of high-performance computing (HPC) systems acquired some 700 patents as well as many large customers.

And even as SGI unraveled this year, continuing to lose money, laying off workers and facing a delisting of its stock by Nasdaq, some of those big users continued to buy its products. For instance, two months before the Rackable buyout announcement, SGI said it had received a $40 million, multiyear contract to provide HPC systems and storage equipment to the U.S. Department of Defense.

But now, such customers are in limbo.

One longtime user is the University of Minnesota Supercomputing Institute, which has been using SGI systems since the late 1980s. Gabe Turner, a system administrator in the HPC group at the Minneapolis-based institute, said he doesn't know how the sale of SGI to Rackable will affect him.

"My biggest concern is the support, and specifically what will happen to the support contracts," Turner said. "We've got support contracts that are just a little over a year old, and what is the state of SGI going to be two years from now? I just have no idea."

SGI never really regained its footing after a bankruptcy filing in 2006. The company tried to adapt by shifting its focus to x86-based systems running Linux and Windows, in hopes of expanding its market reach. But its losses continued; SGI finished the fiscal year that ended last June with a $153 million net loss on revenue of $354 million, and it lost $82.9 million in the first half of the current fiscal year.

In a new bankruptcy filing earlier this month in U.S. Bankruptcy Court in New York, SGI said its business model was based on direct sales. "The shift to standardization in the computing industry, however, has favored companies with high-volume sales through resellers and channel partners," it added.

As the company's financial performance continued to deteriorate, it cut costs. As of last June, SGI had 1,632 employees. But in the bankruptcy filing, the vendor said that over the last 12 months, it had reduced its workforce by one-third.

SGI officials didn't respond to requests for comment, and Fremont, Calif.-based Rackable said that it won't comment about the situation at SGI until the buyout deal is completed. Rackable said previously that it expected to complete the purchase of SGI's assets by the end of May, subject to the bankruptcy court's approval of the deal.

Turner said SGI makes quality products that are well supported and are a good fit for technical and scientific applications. "SGI is actually really great on that," he said. "They have scientists on staff that know how all these scientific applications work."

As for the DOD, Christopher Willard, an analyst at Tabor Research in San Diego, said that even if the Pentagon had concerns about SGI's financial condition, the contracting process may have obligated it to pick the struggling vendor based on best-price rules. He added that the DOD likely has protections built into the contract that don't require it to pay any money until products are delivered.

Willard said SGI has some valuable assets, especially within its services business. And there's always the possibility that another vendor could step in and try to outbid Rackable for those assets during the bankruptcy process. "There is nothing exclusive about the deal" between SGI and Rackable, he said.

Addison Snell, another Tabor analyst and a former SGI employee, recalled when the HPC vendor was known as "The Gee-Whiz Company" for its innovation. He drew a parallel between Sun and SGI in a blog post, writing: "Silicon Graphics' technology leadership in workstations and servers was widely acknowledged, but our executive leadership suffered from a collective inferiority complex when compared to Sun, Silicon Graphics' twin sister."

Ironically, Sun may soon find itself with a new owner as well. Sun, which like SGI has been hit by revenue declines, losses and layoffs, reportedly discussed a possible acquisition with IBM before the talks broke down this month. And Bloomberg News reported today, in a story citing anonymous sources, that Sun officials would be willing to revive those talks if IBM sweetens its offer.

Copyright © 2009 IDG Communications, Inc.

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