SGI heads for turbulence again?

Sadly I missed John West and the InsideHPC folks at Reno. This was my fault, it was my intention to drop by and say hi. I read InsideHPC and a few others frequently. Turns out, not frequently enough, as he noted something from the San Jose Mercury News on SGI.

Its “old” news now (more than 24 hours), but an SGI shareholder is pushing for a sale to a competitor. The rationale for this is to reduce the SG&A costs. This is basically the cost of sales, of running the company, and all the associated bits.

The Merc noted that

Mountain View-based Silicon Graphics exited bankruptcy in October 2006, and the company’s shares have declined 7.4 percent since. The company posted a loss of $36.2 million for the quarter ended Sept. 28, as sales slid 11 percent to $40.1 million.

A strategic buyer might achieve savings through cost reductions, Southpaw said.

Hmm. I hadn’t paid attention to their stock. You can see a chart of it here …

Looking at the slope of that downward trend, it is hard to see it not intersecting zero … I am seeing something that looks like a $8 drop per 4 month interval. At $17.95/share, this gives them a little more than 8 months if this trend continues.

Southpaw, the private equity firm, must have been optimistic when they said

There is “significant” interest from potential buyers, and a sale would maximize the company’s value to shareholders, Southpaw said in a Nov. 9 letter to the company, disclosed in a regulatory filing Tuesday.

The question is whom would want them? A point I made a year ago is that they are (re)entering a market Dell intends to own with a product mix that is more costly, and they are in a weak financial position. I would be surprised if they can find a strong buyer. IBM doesn’t need them, nor does HP. Dell has no use for them. Cray? That would be irony, but Cray has its own issues to deal with. NEC? Unlikely. Sun?

That would be my guess. Sun has never really had a credible HPC story, despite having a few big wins (TACC, Tokyo, …) . Like SGI of years ago, Sun can’t seem to grasp that some of its “crown jewels” aren’t worth as much anymore. The inability to adapt to market realities nearly killed SGI. It will kill others who don’t adapt. But snagging SGI would give Sun some serious HPC street credibility, though I would imagine that there would be a serious disruption in the product continuum. That is, while I would guess Sun would be most likely, I would also guess that this would not likely work very well. Think SGI and Cray. The battles that went on between the organizations were street fights at best. There were programs that should have been killed and never were, and programs that were launched that never should have. There were cultural differences, and management did little to try to integrate the companies. Cray had some really good people, but there was also a reason why they were nearly going belly up in the mid 90s. Markets change over time, and companies that can’t adapt to this rapidly become ex-companies.

I have no doubt that a Sun-SGI mashup would be painful at best.

There could be other suitors. Raytheon. Or SAIC. Or … I just can’t imagine the traditional vendors being seriously interested, apart from taking out a competitor, and they are doing that already.

I guess I am skeptical about there being a suitor. SGI will need to pull out of its current trajectory on its own. Unfortunately, it is competing with a commoditized HPC market, and a difficult entry into non-HPC markets, in which it has no intrinsic advantages, no real name recognition, and limited value relative to competitors who do. Like Dell.

This is a point I had made previously.

In talking to people at SC07, many are looking to branch out beyond HPC if they aren’t already. The issue is that this is hard, and it takes time. Time SGI may not have.

If the investors don’t get their way, I wonder if they might try to force a chapter 7. With only 5.3% of the company, this wouldn’t likely fly. But if they convince and recruit enough other investors …

No matter if there is a suitor or not, SGI is in for a bumpy ride.

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