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Rackable Rockets on Sun Rumor

Alexei Oreskovic

Rackable Systems(RACK Quote) shares shot up Thursday as the server maker became the latest company to get swept up in a frenzy of speculation about acquisitions in the tech sector.

While none of the tech buyout rumors has borne out so far, investors cottoned to the newest chatter and sent Rackable shares up more than 11%, or $1.82, at $18.28 in trading.

Earlier this week, investors ran up shares of Palm(PALM Quote) and Gateway(GTW Quote) in hopes that the companies would be acquired. Both stocks have since given back the gains, as the prospects of the rumored deals appeared less likely.

Rackable's putative suitor is Sun Microsystems(SUNW Quote).

"There's a rumor around -- strictly a rumor -- that Sun is going to buy them," says Chirag Vasavada, a hardware analyst with T. Rowe Price.

Rackable has been a subject of buyout rumors in the past, although Dell(DELL Quote) has usually been the rumored acquirer, notes Vasavada. "Sun is a little bit of a new name thrown into the discussion," says Vasavada, whose firm is long Rackable.

Milpitas, Calif.-based Rackable sells servers based on industry standard x86 microprocessors made by Intel(INTC Quote) and Advanced Micro Devices(AMD Quote).

The company's focus on customizing its machines so that they consume less energy and can be packed closer together in corporate data centers has won it some key customers.

Rackable's customer list includes marquee Internet names Amazon.com(AMZN Quote), Yahoo!(YHOO Quote) and Microsoft(MSFT Quote). In fiscal 2006, Microsoft and Yahoo! accounted for 34% and 26%, respectively, of the company's $360 million in sales.

Sun is also trying to focus its sales efforts on Internet companies, with new products such as its Galaxy line of x86-based servers as well as servers featuring Sun's proprietary Niagara chip.

Sun says its Niagara-based servers are specially optimized for Web-based tasks, such as processing online commerce transactions.

A representative from Rackable was not immediately available for comment.

Sun spokeswoman Kristi Rawlinson said the company continues to look at acquisitions, thanks to its strong balance sheet, but it does not comment on specific rumors or speculation about acquisitions.

Shares of Sun were down 2.5%, or 16 cents, at $6.33 in late afternoon trading.

Rackable's stock has taken a beating from the Street in past months after disappointing sales guidance and a high-profile executive departure. The company's stock is down 68% from its 52-week high of $56.

On Wednesday, Rackable named a new worldwide vice president of sales, three months after the surprise exit of its previous head of sales.