High performance computing specialist Silicon Graphics ( SGI) is the latest tech stalwart to buckle under the strain of intense competition and a tough economy. The server and storage manufacturer filed for Chapter 11 early Wednesday and announced an agreement to sell "substantially all" of its assets to Rackable Systems ( RACK) for just $25 million in cash. Shares of Silicon Graphics plummeted in response to news of its bankruptcy filing and sale. The company's stock, which had already taken a pounding during the last 12 months, plunged 23 cents, or 56.1%, to close at 18 cents Wednesday. The Sunnyvale, Calif.-based firm became a Silicon Valley success story by selling its high-end gear to movie studios, broadcasters and research labs, but has struggled during the last few years. Even before the global economic slowdown, SGI was already facing stiff competition from rivals such as Hewlett-Packard ( HPQ), IBM ( IBM), and Sun Microsystems ( JAVA). Silicon Graphics even spent some months in bankruptcy protection during 2006 in an attempt to get its house in order. The company emerged from Chapter 11 but has continued to wrestle with losses and a heavy debt load. At least one technology analyst was surprised by Silicon Graphics' bargain-basement price-tag. "SGI has been having trouble for years so some sort of deal seemed likely, but I was frankly shocked by the $25 million price," wrote Charles King, principal analyst at Pund-IT, in an email to TheStreet.com. "For the equivalent of some VCs' running bar tabs, Rackable acquired a stable of innovative systems that significantly deepens its product offerings and should broaden its customer base."
The company listed assets of $390.5 million and total debt of $526.5 million in its latest Chapter 11 filing, according to Reuters, but sought to reassure its customers in a statement released Wednesday. "We have been working very hard to strengthen our company, and today, we've taken another big step in that direction," said Robert Ewald, the Silicon Graphics CEO. "This transaction represents a compelling opportunity for Silicon Graphics' customers, partners and employees." Rackable's CEO Mark Barrenechea, sent out a similar message. "Together, we believe we will be a much stronger entity with great products and people offering a compelling proposition to compete more effectively in, and across, our collective markets," he said. "This combination gives us the potential for significant operational synergies, a strong balance sheet, and positions the company for long-term growth and profitability." Even with Silicon Graphics' extensive debt, Pund-IT's King thinks that the deal is still a good one for Rackable. "The deal is not without risk but some of SGI's focus areas
such as lower end high performance and supercomputing, for example, mesh well with Rackable's offerings and could become highly profitable in the years ahead," he explained. Rackable's purchase of Silicon Graphics is subject to a number of closing conditions, including the approval of the Bankruptcy Court. The transaction is nonetheless expected to close within approximately 60 days. Despite a broader rally in tech stocks that saw the Nasdaq rise 1.51%, investors responded negatively to Rackable's move, and its stock slipped 18 cents, or 4.43%, to close at $3.88.