SGI Expected to Make a Bid for Troubled Cray Research
SAN FRANCISCO — In a surprise move, Silicon Graphics Inc., the maker of powerful graphics computers used to render the special effects in motion pictures such as “Forrest Gump” and “Jurassic Park” as well as 3-D workstations for scientists and engineers, will announce its intention to acquire troubled supercomputer pioneer Cray Research at a news conference to be held today in New York, sources said.
Cray executives are expected to support the acquisition. Top executives for both companies were in New York on Sunday in anticipation of the announcement.
The price of the deal remained undisclosed. Cray’s stock closed at $25.25 on Friday, giving it a market value of $644.4 million. Silicon Graphics stock closed at $27.50, down 25 cents. Both trade on NYSE. Trading of Silicon Graphics on the Pacific Stock Exchange was suspended late Friday after the company issued invitations to a “major strategic announcement.”
News of the planned acquisition was greeted with mixed reaction by industry watchers. Although Cray still dominates the market for supercomputers, the powerful computers used to solve complex problems such as weather forecasting, molecular modeling and earthquake simulations, it is a market that is shrinking dramatically. One of the reasons for the decline is that pricey Cray supercomputers are being supplanted by less expensive machines from Silicon Graphics.
Cray, based in Eagan, Minn., posted a loss of $226.4 million, or $8.95 a share, on revenue of $676.2 million for fiscal year 1995, a revenue decrease of 27% from the previous year.
Further, analysts said buying Cray would do little to bolster Silicon Graphics’ position in the exploding market for the Internet where it has been outshone by competitors such as Sun Microsystems Inc.
Mountain View, Calif.-based Silicon Graphics recently disappointed Wall Street with a relatively poor showing for its second fiscal quarter, reporting a profit of $52 million, or 30 cents a share, down from $59 million, or 34 cents a share from the corresponding quarter last year. Revenue for the quarter was $671.7 million compared with $549.6 million a year ago, less than the growth rate that had been expected by financial analysts.
“I’m not sure I understand the rationale for buying Cray,” said San Francisco money manager Robert Herwick. “There’s a theory that you buy somebody you’re destroying to speed up the process, but Silicon Graphics will have to pay premium in this case to do that.”
But Gary Smaby, president of the Smaby Group, a Minneapolis market research firm, said Cray “has the most respected name in the high-end scientific and engineering communities” and will bring to Silicon Graphics a group of talented computer designers. To make the proposed acquisition successful, Silicon Graphics would have to move quickly to make sense of overlapping and incompatible products, Smaby said.
Cray controls about 70% of the market for supercomputers costing more than $5 million and about 35% of the market for those in the $5-million to $1-million range, according to Smaby. But Cray has a tiny share of the fastest-growing segment of the supercomputer market--machines priced between $100,000 and $1 million--where Silicon Graphics has been dominant.
The acquisition would end the independence of a company long considered a prime example of American technical excellence. Cray was started in 1972 by legendary computer designer Seymour Cray, who invented the first supercomputer in the late 1950s while at Control Data, a company he also founded.
Crays were sought after by universities, the military and the government. Cray debuted its first machine in 1976 and by the early 1980s was doing a brisk business. The end of the Cold War reversed Cray’s fortunes. It tried to target its machines at private industry but encountered fierce competition from companies such as Silicon Graphics and Sun Microsystems.
Several supercomputer companies have filed for Chapter 11, including Seymour Cray’s latest venture, Cray Computer, a company funded by Cray Research.
The acquisition would be the biggest ever undertaken by Silicon Graphics. In 1992, it purchased semiconductor maker MIPS Computers for about $500 million.
