October 31, 1997
SGI's Plight Shows Rapid Growth,
Strategy Discord as Chief Resigns
By LEE GOMES
Staff Reporter of THE WALL STREET JOURNAL
Not long ago, Silicon Graphics Inc. was most often compared with fellow
Silicon Valley star Sun Microsystems Inc. Both were brainy, fast-growing
and bucking the trend toward personal computers with glamorous,
high-powered workstations and servers.
Today, though, Silicon Graphics is most often compared with another
company, Apple Computer Inc. Analysts, in fact, see many parallels with
that long-suffering computer maker: Despite stellar pasts, both have seemed
insular, out of touch with market trends, badly behind competitors and
unpredictable, serving up a series of unpleasant surprises to Wall Street.
Indeed, at $2.6 billion, SGI's current market capitalization is much closer to
Apple's $2.1 billion than it is to Sun's $12.3 billion. That's a striking reversal
considering that only three years ago, Silicon Graphics was worth more than
Sun.
The reasons for SGI's plight, say people inside and outside the company,
include too-rapid growth, overly ambitious acquisition plans and high-level
strategy disagreements. But one of the biggest reasons, they say, are the
interests and inclinations of the company's chairman and chief executive,
Edward R. McCracken. On Wednesday, Mr. McCracken said he was
stepping down as chief executive, and said he might give up his chairman's
title once a successor is named, a process expected to take about three
months.
No High Drama
His resignation followed a daylong SGI board meeting that participants have
said came without table-thumping or high drama. A person familiar with the
board's operation said that Mr. McCracken, after 14 years as chief
executive and on notice that his performance was being closely watched,
simply asked "Is it time?" and was told by the board that it was.
Indeed, the job of running SGI had evolved, by dint of a series of
challenges, to require the kind of hands-on, operations-oriented skills that
were never Mr. McCracken's strong suit. "I have to confess that, I tend to
be most interested in things that are more strategic and creative," he said in
an interview. "I tend to want to do things that haven't been done before."
After building the company for 13 years, Mr. McCracken had hoped by
now to give up most operating responsibilities, people familiar with his
thinking say. But those plans were foiled last year when Tom Jermoluk,
SGI's chief operating officer, was hired away to a Silicon Valley startup.
"All of a sudden the world crashed around Ed," said one former SGI
official. "The company started falling apart and he was left holding the reins
in operations, which was something he didn't want. He tried very hard, but it
wasn't enough."
A thoughtful man, good at consensus building, Mr. McCracken did not
apply stiff medicine quickly. In fact, the layoffs of as much as 10% of the
company's 11,000-person work force that were also announced
Wednesday are the first in the company's 15-year history.
Mr. McCracken concedes that it was a mistake to not quickly hire a chief
operating officer to succeed Mr. Jermoluk. One high-level official said SGI
didn't do so because the hard-charging Mr. Jermoluk had such a strong
personality that "the company needed time to recover."
Need for Oversight
Strong oversight was needed because the company's business changed
drastically. SGI started out by selling machines to engineers, scientists and
Hollywood artists, but later branched out into wider business applications. It
hired thousands of employees, but didn't put in all of the control and
planning systems that most multibillion dollar companies need.
SGI officials concede that the lack of those controls is a major reason for
consistently missing Wall Street expectations in the past two years. For the
quarter ended in June, for example, SGI reported far more profit than
analysts had expected; the company later discovered that the reason wasn't
fundamental improvement in demand, but simply customers accelerating
purchases from the next period. In the September quarter, by contrast, it
blindsided analysts with a loss because the company underestimated the
time needed to close sales for large server machines.
As it moved into mainstream corporate computing, Silicon Graphics didn't
change its sales style quickly enough. The company had such a following in
technical communities that each new machine was snapped up with little
marketing effort. In the corporate world, however, a big sale requires
months of tenacious sales calls, the sort Sun became an expert in during the
past few years.
"SGI is like the brilliant child who never had to study when growing up,"
said David Wu, analyst with ABN-AMRO in San Francisco. "Then they get
to college and find all these other brilliant people. They have to study now."
High-Level Discord
The company was also hobbled by high-level disagreements. Founder
James Clark often criticized Mr. McCracken for not moving more quickly
to sell low-end computers; Mr. Clark finally left the company in 1994 and
founded Netscape Communications Corp. More recently, when lower-level
SGI officials proposed selling machines based on technology from
Microsoft Corp. and Intel Corp., they were blocked by Mr. Jermoluk.
Thursday, Mr. McCracken said that not moving more quickly to low-priced
"Wintel" machines, beefed up with SGI's renowned graphics, was his
biggest regret. The company still carries the burden of maintaining a
chip-design business, Mips Technologies, it acquired several years ago.
Some analysts also criticize the February 1996 purchase of supercomputer
maker Cray Research Inc. for $740 million. Mr. McCracken defends the
deal, saying it met all of SGI's financial targets. But others say the task of
integrating Cray was a big management distraction.
While acknowledging some mistakes, Mr. McCracken rejects the
comparison with Apple. "We have had consistent management, a very
diverse customer base and a wide product line," he said. One prominent
executive recruiter agreed, saying it will be far easier for SGI to find a
top-flight chief executive than it has been for Apple.
"They still have cutting-edge technology and a growing market, but the
board is going to need to move quickly," this person said.
Investors are still cautious. SGI's stock is off nearly 50% from a month ago,
and fell further Thursday, closing at $14.25, down $1.50, or 9.5%.
While rumors are swirling about a possible buy-out of SGI, either by
another computer company or else by a group of investors, board members
have said they are not shopping the company around, adding that no one
has made a serious approach to them.
Mr. McCracken also downplayed such speculation, saying the company
was banking on its new NT machines, a revamped sales operation and its
new, leaner operation. "We are setting an independent course for this
company," he said. |
