March 2, 2000 11:15 AM PST

Supercomputer maker to buy Cray, change name

Is there new life for a faded supercomputing star of the 1990s?

Supercomputer behemoth Cray Research, acquired by SGI in 1996 and put up for sale last summer, is being bought by tiny supercomputer maker Tera Computer.

Tera is betting its future on the acquisition and the combined companies' ability to take on the likes of IBM, which has recently souped up its supercomputing efforts. Tera also faces the challenge of digesting an operation significantly larger--125 employees vs. about 850 for Cray--and combating companies building supercomputers from PC parts.

Jim Rottsolk

But Seattle, Wash.-based Tera also picks up valuable assets: the Cray name, three supercomputer lines and an installed base of 600 supercomputers, which translates to a total of 200 customers in 30 countries.

The selection of Tera marks a change in strategy from September, when SGI said it had selected a financial partner to help set Cray up on its own. Apparently that plan didn't work out.

SGI spokesman Steve Conway confirmed that there were at least two bidders, including the unspecified financial company and Tera.

SGI also had difficulties finding a partner to take over a line of its Intel-based workstations, a plan that was abandoned in October. As the name implies, supercomputers are much more powerful than the PCs most people use everyday, capable of very intensive tasks, such as weather forecasting, aircraft design and military operation modeling.

Tera and Cray, both makers of large vector supercomputers, will combine as one new company, Cray Inc. Neither Tera nor SGI would reveal the terms of the sale beyond an undisclosed exchange of common stock, cash and notes. The deal, which is subject to regulatory approval, is expected to close within 60 days.

The new company anticipates about $200 million in annual revenue and will employ 900 people, about 400 of which are supercomputer hardware and software engineers. Tera announced no layoffs related to the acquisition.

"The Cray acquisition advances Tera's growth strategy by creating a profitable, new company with major market presence, outstanding talent, complementary product lines and a strong infrastructure," Jim Rottsolk, Tera president and chief executive officer, said in a prepared statement.

The number of candidates for acquiring Cray were limited. Because the company sells computers to U.S. government agencies such as the National Security Agency and nuclear weapons labs, Japanese manufacturers of computers comparable to Cray's--Fujitsu, Hitachi, and NEC--were out of the running.

SGI purchased Cray for $767 million in 1996, according to a Securities and Exchange Commission filing. The price Tera paid is "a much lower figure," Conway said, suggesting that a price less than $100 million wouldn't be surprising.

However, the apparent difference between what SGI bought Cray for and what it sold it for is misleading, because the 1996 acquisition included cash and order backlog worth several hundred million dollars, Conway said. The net purchase price was closer to $175 million, he said.

One of the new company's goals will be expanding high-end server and supercomputer sales to the Internet backbone.

"Cray, Inc. will reinvigorate the global high-performance sector by focusing on serving the needs of customers who want to solve the most demanding problems," International Data Corp. analyst Debra Goldfarb said in a prepared statement.

IDC predicts sales of high-performance computers, such as those sold by Tera and SGI, to grow to about $7.5 billion in 2003 from $5 billion this year. But demand for the largest supercomputers--those that Tera is betting its future on--could be as little as $1 billion in annual sales, according to the Framingham, Mass.-based market researcher. IDC also noted Cray's forthcoming SV2 could reclaim a share of the supercomputer market from Japanese competition. But the SV2 supercomputer, which SGI announced in 1999, isn't expected to reach the first customers until 2002.

Tera's biggest challenge will be fending off competition from the likes of IBM, which use a different and, in some ways, easier to produce technology, known as parallel processing. IBM, for example, has had much success producing and selling systems based on parallel processing.

This method spreads computing tasks among many processors running at the same time, while vector supercomputers sold by Tera and Cray rely on fewer, faster processors. Cray also produces a highly parallel system but had planned to merge that with its vector supercomputers in 2002.

Tera has taken vector supercomputing further than Cray, with what it calls multithreaded architecture, which uses proprietary processors capable of executing 128 computing functions, or threads, versus the typical one.

Cray's future faltered with that of SGI, which in a major August reorganization announced it would sell the once lustrous supercomputer division. In the quarter end Dec. 31, SGI narrowed its losses to $1 million, or 1 cent a share, from $25 million, or 14 cents, a year earlier.

When SGI bought Cray in 1996, it cut the workforce from 4,500 to about 850. SGI will continue to sell another type of supercomputer.

Tera has had its own troubles. During its fiscal third quarter Tera lost $7.5 million, or 32 cents per share, on sales of $850,000. The supercomputer maker, which has long struggled to turn a profit, could face some difficulty digesting the larger Cray, analysts said.

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