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April 2, 2009

Rackable Makes Bid to Swallow Up Silicon Graphics

Michael Feldman

The SGI deathwatch is over. On Wednesday, Rackable Systems Inc. announced its intent to “acquire substantially all the assets of Silicon Graphics, Inc.” for $25 million in cash. Assuming nobody comes in and outbids Rackable, the whole deal should be consummated in 60 days.

Rackable coordinated the asset purchase agreement with SGI’s filing of its Chapter 11 petition. The acquisition will be fast-tracked using the Section 363 process of the US Bankruptcy code, which will enable Rackable to acquire SGI without assuming the debt — or at least most of it. In a webcast on Wednesday, Rackable Chief Financial Officer Jim Wheat stated flatly: “With respect to liabilities, we intend to acquire those liabilities and obligations that we believe will be necessary to run the combined business.”

SGI’s demise is certainly no surprise to anyone following the travails of the company. Since re-emerging from its first bankruptcy in October of 2006, it quickly settled into a pattern of deficit spending, bleeding tens of millions of dollars per quarter. Despite some recent attempts at cost-cutting, it was clear that there was little chance SGI would be able to right itself, as I implied in a commentary last December. The company’s fate was sealed three weeks ago when it was notified its stock would be delisted from Nasdaq exchange.

Not many details were released with the announcement, but clearly the intent by Rackable is to use SGI’s product portfolio and technology to establish a presence in the high-flying HPC market, something it was clearly interested in doing, but had failed to accomplish organically. Today, Rackable is a tier 2 OEM that battles with the big boys — IBM, Dell and HP — for market share in the enterprise server space.

Although the company has a relatively-small customer base, innovative hardware and support for custom-built gear has allowed Rackable to capture a number of accounts with Internet, financial services, oil and gas, and digital media firms. And despite some recent setbacks, Rackable has amassed enough cash reserves to make the acquisition, redirecting the money it originally intended for a $40 million repurchase of stock into the SGI buyout.

As noted by IDC’ers Earl Joseph and Steve Conway on the firm’s Web site, if the deal goes through, Rackable immediately becomes a player in HPC:

In a nutshell, the acquisition of the SGI assets instantly turns Rackable into one of the five major HPC OEMs, in addition to its non-HPC lines of business. In an IDC private survey last year, HPC buyers often expressed high praise for SGI’s products and innovation, but wanted the company to take on a partner in order to stabilize its finances. The Rackable announcement directly addresses and should alleviate this buyer concern.

Buying their way into the multi-billion dollar HPC market for a paltry $25 million certainly looks like a shrewd move for the company, but to turn SGI’s rags into riches will take some finesse. From what could be gleaned from the press release and the brief webcast discussion on Wednesday, Rackable intends to retain most or all of SGI’s portfolio of hardware, software and services.

One product line that was specifically referenced as a keeper was the Altix shared-memory system, and its next-generation incarnation, UltraViolet. The high-end Altix supers are beloved by NASA, a number of national labs, and a few research centers, but it’s doubtful that SGI was turning a profit on them. The Register’s Timothy Prickett Morgan has suggested the possibility that SGI intended to dump the Itanium chip in the shared-memory machines, in favor of the new Nehalem processor, a topic he wrote about on Wednesday in the context of the Rackable bid:

UltraViolet, the code name for SGI’s fifth-generation NUMAflex shared-memory clusters, was referred to as an “x86 shared memory system” in a similar statement from Doug Britt, SGI’s senior vice president of global sales and service – so I guess we all know what SGI had planned for the future quad-core Tukwila Itaniums…. The scuttlebutt was that SGI would ditch Itanium for Nehalem, but there was always the possibility that the Altix 4700 shared-memory supers could be tweaked to support either chip if the QuickPath Interconnect were on both styles of system boards.

More generally, the key to Rackable’s success will be figuring out how to leverage all of SGI’s intellectual property, while streamlining the R&D, management, sales and marketing structures. Unfortunately that means some number of SGI employees will soon be looking for work elsewhere. During the Wednesday webcast, Rackable CEO Mark Barrenechea said they were in the process of looking for “operational synergies” and “supply chain leverage” to reduce expenses, although he offered no details beyond that.

It’s a shame that a company with such a storied history in supercomputing couldn’t make a go of it in the brave new world of commodity HPC, but if Rackable turns out to be the savior of SGI technology, that would be the next best thing.