SGI asset sale completes unravelling of tech icon

Purchase by Rackable raises questions from users

The assets of Silicon Graphics are being sold to Rackable Systems Inc. for US$25 million (NZ$43 million), which is pocket change by Silicon Valley standards. The deal, announced on April 1, is a difficult turn for a company that was founded the same year as Sun Microsystems, in 1982.

That year, Apple Computer (as Apple was known at the time) was only six years old, and Oracle 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 such as Sun did. SGI's revenue peaked at US$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 unravelled this year, continuing to lose money, laying off workers and facing a delisting of its stock by the Nasdaq, some of those big users continued to buy its products. For instance, two months before the Rackable buyout announcement, SGI said it had signed a US$40 million, multiyear contract to provide HPC systems and storage equipment to the US 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, says 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 says. "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; it finished the fiscal year that ended last June with a US$153 million net loss on revenue of US$354 million, and it lost US$82.9 million in the first half of the current fiscal year.

In a new bankruptcy filing earlier this month, SGI said its business model was based on direct sales. "The shift to standardisation in the computing industry, however, has favoured companies with high-volume sales through resellers and channel partners," the filing stated.

As SGI's financial performance continued to deteriorate, it cut costs. As of last June, it had 1,632 employees. But in the bankruptcy filing, it 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 Rackable won't comment about the situation at SGI until the buyout deal is completed. Rackable has said previously that it expects to complete the purchase of SGI's assets by the end of May, subject to the bankruptcy court's approval of the deal.

The University of Minnesota Supercomputing Institute's Turner says 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 says. "They have scientists on staff that know how all these scientific applications work."

As for the Defense Department, Christopher Willard, an analyst at Tabor Research in San Diego, says 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 department likely has protections built into the contract that don't require it to pay any money until products are delivered.

Willard says 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 says.

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, discussed a possible acquisition with IBM before the talks broke down earlier this month.

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