SGI--news to ponder
forbes.com
SILICON VALLEY. 01:30 PM EDT—Peeling off businesses like a cat sheds fur, SGI (nyse: SGI) today unveiled a restructuring plan designed to get Windows NT workstations and supercomputers off its plate and give its long-suffering turnaround some momentum.
The Mountain View, Calif., company announced the formation of separate business units for both its troubled NT-based workstation business and its Cray supercomputer operation. SGI said it has found another computer systems company--possibly IBM--with which it plans to form a joint venture to manage the workstation line. The company said it's looking for someone to take over operation of the supercomputer unit.
SGI said it plans to concentrate on selling large, expensive server computers and pushing its highly touted graphics technology into the mainstream through a previously announced partnership with chipmaker Nvidia (nasdaq: NVDA). SGI said yesterday it will transfer a graphics engineering team to Nvidia to help develop future products.
Today's moves are expected to eliminate 1,500 jobs--more than 16% of SGI's 9,000-strong workforce. "The SGI that emerges from these alliances will be somewhat smaller than it is today, but it will be designed to focus on the technologies and markets where we add the most value…," said Chief Executive Richard Belluzzo.
Yet the restructuring could also be viewed as a fire sale meant to position the company for a possible takeover. Although its stock has more than doubled from its 52-week low, it's still trading in the teens. Commenting on the restructuring, analyst Daniel Kunstler of J.P. Morgan said: "The cleaner the story is for them, the more likelihood that they could find a buyer for SGI."
Senior Vice President Bill Kelly discounted the possibility that SGI would put itself on the block. "We'll be smaller but also faster growing, and that's the heart of it," he said. "It's a question of finding the places where we think we can win."
SGI officials have said for months that the future lies in the sales of high-end server computers used to manage networks. The company believes its servers have an advantage over rival machines from Sun Microsystems (nasdaq: SUNW), IBM (nyse: IBM) and Hewlett-Packard (nyse: HWP) because they're built to accommodate larger amounts of bandwidth--a capability increasingly needed for shifting sound, video and graphics over the Internet.
"They've got a head start," said analyst Joyce Becknell of the Aberdeen Group. "The question is will they be able to execute on what they've got."
By getting rid of its Windows NT workstation business, SGI has scrapped the main component in a previous restructuring plan, which was put in place before Belluzzo took over as chief executive in January 1998. With its Unix workstation business lagging, the company had hoped to become a major seller of NT workstations that included its vaunted graphics system. But there were delays in shipping its new workstations, and in the end the company wasn't big enough to compete against Compaq Computer (nyse: CPQ), Dell Computer (nasdaq: DELL) and other makers of PC workstations.
Analysts applauded SGI's decision to unload its Cray unit, which it acquired in 1996 for $576 million. "They'd gotten pretty much everything they were going to get out of it, and from now on it was going to sit there like a lump, draining revenues," said Becknell. However, industry observers said it might be hard for SGI to find someone to take Cray off its hands. The unit, which accounts for less than 10% of SGI's revenue, has been unprofitable.
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