[updated] see bottom:
This said, read the press release. Specifically the portion that indicates that
Rackable has signed an Asset Purchase Agreement to acquire substantially all the assets of SGI, and to assume certain liabilities relating to the assets, pursuant to Chapter 11 of the U.S. Bankruptcy Code, under which SGI filed its petition in New York on April 1, 2009.
Yes, this is right (and assuming it is not an April Fools joke), this means SGI file for bankruptcy this morning. They had a looming $5M payment due last Friday to Morgan Stanley. I was searching for information as to whether or not they had made that payment, as I thought that MS might force them into a chapter 7, and sell off their assets.
Well, it looks like they hit chapter 11 (second time), and did an asset sale.
So, if this is all real, then SGI is done. It is now part of Rackable. They had ~1500 people going into this. I’ll be surprised if they have more than a hundred or two make the move.
Completion of the transaction is subject to a number of closing conditions, including the approval of the Bankruptcy Court, and other uncertainties. Subject to such conditions and uncertainties, the transaction is expected to close within approximately 60 days. It is expected that SGI’s business operations will continue during the pre-closing period. SGI’s international operations would be part of the sale, but would not be part of the bankruptcy process.
This was done as a very fast sale. I knew they were in trouble, and it looks to me like this was negotiated quickly (it doesn’t look pre-packaged) so as to avoid the chapter 7 filing. Still Morgan Stanley and other creditors could object, and if so, throw a monkey wrench into this. In which case, chapter 7 is far more likely.
My sympathies go out to all my former colleagues still employed (as of yesterday) at SGI.
Hopefully business schools will pick up the sad tale of this company’s decline as in a section on “how not to run a company, and lose great momentum”.
[update 1]: Wow … I called this some time ago. Spot on analysis. Read the form 8k for the filing.
The filing of the bankruptcy petitions described above constitutes an event of default under the Senior Secured Credit Agreement, dated October 17, 2006
Ok, we knew that part … this is where it gets interesting
, as amended, (the ???Credit Agreement???) with Morgan Stanley Senior Funding, Inc. as administrative agent and revolving agent, Morgan Stanley & Co., Incorporated as collateral agent, and the other Lenders and Credit Parties thereto (as defined therein) and resulted in the acceleration of all amounts due under the Credit Agreement.
This is almost exactly what I said could happen here.
That is, if they can???t achieve specific indicated performance, the people who loaned them money may say ???all done.??? They will default if they cannot get their earnings up above the levels they agreed to. Which they haven???t been able to in recent history.
I am betting that on Friday the 27th of March, in the afternoon, 16 days after I wrote the previous bit, Morgan Stanley called SGI and said “its time to pay”. SGI said “hang on a moment”, and Morgan Stanley said “no.” I bet that MS gave them until COB on the 3rd to get their affairs in order and signaled an intent to declare them in default.
This is speculation. It is also now history.
This is what else is in the 8k, and why I speculated like this …
The ability of the creditors to seek remedies to enforce their rights under the Credit Agreement is automatically stayed as a result of the filing of Chapter 11 cases, and the creditors??? rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. The automatic stay invoked by filing the Chapter 11 cases effectively precludes any actions against SGI resulting from such acceleration.
This is effectively SGI reminding its creditor that any remedies (asset seizure, sale, chapter 7 forcing) is automatically stayed during bankruptcy proceedings. But … the creditors can object to the sale, and demand a better price. It would not surprise me if they do something like this, as it looks like SGI owes them about $142M and change.
As of March 31, 2009, under the Credit Agreement, the total principal amount of the outstanding obligations under the term loan was approximately $141.7 million and the total principal amount of the outstanding obligations under the revolving loan was approximately $20.7 million.
They had to pay MS $20.7M on Friday. They couldn’t make the payment. MS told them they were in default, and gave them a very short window to correct the default. And SGI went this route.
This story is not over. Its not Rackable walking away with the assets on the cheap.
This one could get quite interesting. And not in a good way.
Hmmm… I wonder who owns my patent now. Maybe I should have the company file to purchase that.
[update 2] John (both of them) are covering this at InsideHPC. Two articles. First was the announcement, and my sympathies to John L as this is/was his employer. It sucks when they implode on you. Second was a similar analysis to what I did in the past with SGI acquiring the LNXI assets.
I wrote previously
Moreover, if you look at what SGI did relative to LNXI, they basically purchased LNXI???s assets, which had secured its debt.
… which is almost exactly what happened to SGI today. Their assets were purchased by Rackable (tentatively), but this was done to escape debt service obligations via a fast chapter 11.
More to the point, I had pointed out in this article that
Onerous T&C are great to force vendors to deliver what they promise. It will also effectively force all the innovative vendors, the ones that take risks, out. Well, they can take the risks, and do well if they succeed, but there is risk. The T&C we have seen suggest that not only do the purchasers want a low price, they want no risk. Drive enough small companies out of the market, and you are going to get a uniformly bland bit of me-too clusters. Which is where things are largely headed.
But I am digressing.
This was discussing the problem in terms of the T&C imposed by the government. They are quite onerous.
As are some, quite frankly, from universities. We have walked away from business with ridiculous T&C’s. We won’t chase bad business. SGI did. As did LNXI. Well SGI had other issues I won’t get into, but thats for a different post.
With this in mind, a commenter at InsideHPC.com pointed out:
Wonder if we finally can call the acquisition strategy of the DoD Mod program the harbinger of death to HPC big iron (LNXI, SGI). I can???t help but wonder if Cray Henry will finally get that they are not helping the industry.
Heh. Spot on.
All Government HPC purchases should be on the open market (not under GSA contract) and done by industry standard T&C.
That is, unless you want exactly one vendor doing HPC, for whom HPC is but rounding error in their business, and a fast business decision can effectively turn off HPC at that organization.
Which is where we are (rapidly) headed.
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