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Silicon Graphics to Acquire Cray Research in $739.2 Million Deal

"Silicon Graphics Inc. agreed to buy Cray Research Inc. for stock and cash valued at $739.2 million, a move that it hopes will eventually bolster its presence in corporate America’s back office."

"... But analysts said Cray, which is an unprofitable leader of a shrinking supercomputer market, could not have gotten a higher bid."

Shareholder Value Creation 

How is the deal expected to create value for Silicon Graphics’(SGI) shareholders?

Let’s start with general considerations and then look at the specifics here.

operating cash flow = revenue - cost - tax bill

The article does not indicate any areas where cost cutting might be implemented, neither any sources of tax benefits. Thus, we will concentrate on sources of additional (that is incremental) revenue.

Sources Of Revenue Creation:

A major source of value creation is expected to come from sales of computers with price tags of $100,000 or more. But where is the source of SGI’s advantage over competitors like Sun or HP? A possible advantage scenario is presented by the WSJ whereby SGI would be able to "bundle" the sales of its supercomputers with its own workstations and would thus capture some of the latter market from competitors. "Cray also has a small business that sells supercomputers to businesses like Citicorp, BankAmerica Corp. and Merrill Lynch & Co., which use the machines to forecast stock-market fluctuation or run corporate-database software made by Oracle Corp. and others. Currently most of these supercomputers are hooked up to networks of workstations make by Sun."

 It is not clear what might be some other sources of incremental revenue. But let’s look at potential pitfalls:

 ‘The commercial marketplace is where the long-term payoff will be,’ SGI’s chief technical officer was quoted as saying. Presumably he was talking about the supercomputers. However, the WSJ, quoting the Smaby Group in Minneapolis (which tracks the industry), expects the market for computers costing over $5 million apiece -where Cray dominates with a 51% share - to fall at 7.5% annually. Thus, unless SGI’s forecast turns out to be better than Smaby’s, additional value might be less than what SGI expected.

Story Source: WSJ, 2/27/96, p. A3

By Alex Tajirian