Speaking about LNXI (and SGI) …

John at InsideHPC blog has a brief writeup on an article I refrained from commenting on a few days ago. In John’s writeup, he (sarcastically) notes that going private didn’t help LNXI. Last I remember, LNXI was never public, they wanted it to be, but I don’t think they ever hit an IPO.

That said, John’s writeup excerpts some of the AP article, with brief comments. My comments on the article are, basically, what took the investors so long? I expected to hear these things last year. This is not an anti-SGI position, but I did expect to hear that one or more of the investors wanted to “unlock value” which is usually code words for an asset/company sale, last year, while the valuation was still higher. It is easy to sell private things and make more drastic changes in the background than in full view of the public.

Just look at SGIC’s performance over the lifetime of this common stock offering …

SGI stock chart over 1.5 years

The clear trend is sadly, unmistakable. Value is being “bled” from the company over time. Their current market cap is 135.3M and they have been losing money, and experiencing negative year over year growth.

If you read their Form 8-K from 27-Feb-2008 you see some interesting things.

On December 6, 2007, the Committee approved amendments to the Employment Continuation Agreements currently in place with certain senior employees of the Company, including the Company’s NEOs that are currently employed by the Company, … will receive, upon termination of employment within 24 months after a change of control, a severance payment equal to 24 months of base salary, a pro-rated amount of his or her target bonus, equity acceleration, and 24 months of COBRA coverage.

Um … What precisely is the company thinking? This says that if my day job somehow acquires SGI (well no, we won’t, not enough money), that the named executive officers will receive 24 months severance package.

Now why would a growing company making great strides put into place this massive golden parachute for senior execs?

I am a firm believe in watching what people do, and (in a sense) discounting what they say. This doesn’t say “hey we are in it for the long haul, and are going to turn this ship in the right direction”. It seems to suggest “when the ship goes down these people have guaranteed positions on a comfy lifeboat”. Moreover, as this wasn’t done for the employees, e.g. it wasn’t a poison pill to fend of an acquisition, it also seems to suggest “and you employees may fend for your selves”.

Yeah, someone is thinking ahead.

I still have a number of friends at SGI. I hope their eyes are open and they are paying attention to this.

If an investment firm does manage to take SGI private, I would expect that they would try to sell off portions of the company, though honestly I am hardpressed to guess who would buy pieces of them. Largely, SGI does not make its own gear anymore. It was in the process of giving that up while I was there a decade ago. This sort of makes them a big version of LNXI. Yes, they do have a number of higher profile wins. But they also seem to be missing the profitable wins, the ones that enable the company to point out that “yes we are making money”. Part of the reason for this is, well, they largely don’t make their own stuff any more, so cost of goods sold tends to be somewhat high. Add to this that they aren’t necessarily serving the bulk of, or even the fastest growing portion of the market. And they are competing with Dell.

I can’t state this enough, it is not a wise idea to try to out-Dell Dell. Or out-HP HP. Those companies can move mountains, and take losses that would be game-ending for SGI, while still continuing operations and a drive forward.

Ok, if you pushed me hard, I might guess Intel would be a potential acquirer of some assets. But it would need to be careful, so as not to upset its own OEM customers. I could see how to make that work, enable Intel’s customers to sell the acquired parts/systems.

Maybe this is what the capital firm had in mind?

The “unlock value” phrase is also used in general liquidation efforts, when the value of the parts exceeds that value of the whole, and you want to stop losing money on the whole by selling of critical parts. Then you can at least recover some of your investment. Call it a stop-loss on value.

Unfortunately, the 8-k I pointed to and quoted from suggests that this might have been a topic of discussion.

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One thought on “Speaking about LNXI (and SGI) …

  1. Hey Joe – I liked your analysis (which is to be favorably contrasted with what I usually do, just point at a story with some homework thrown in). I remember that LNXI was never public and didn’t IPO (though their investors wanted to get there one day). I was just sarcastically observing that I don’t think that going private will help them, as being private didn’t help or hurt LNXI. What hurt LNXI and is hurting SGI is that they’ve lost their way in the market and can’t seem to find profitability again.

    I just wasn’t very effective in my sarcasm.

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