SGI Looks to Exit Chapter 11

Silicon Graphics (SGI) today revealed its plan to emerge from Chapter 11 within the next three months, largely quelling speculation that the troubled high-performance computing specialist is an acquisition target. (See SGI Plans Reorganization.)

Under the terms of the plan, which involves deals with key creditors and is subject to court approval, SGI expects to emerge with a new credit line and debt of $70 million, reduced from $345 million. According to a statement released this morning, the company's notes and debentures will be extinguished in exchange for new common stock and cash, respectively, as well as rights to invest $50 million in additional shares of the reorganized company.

The firm now expects a speedy exit from its current Chapter 11 status. "We are pleased with the progress the company is making and the likelihood of an exit by the end of September," said Dennis McKenna, the SGI CEO, in the statement. Initially, the firm had set a November deadline for emerging from Chapter 11.

SGI filed for bankruptcy protection in May in an attempt to clear debts of $250 million. (See SGI Opens Chapter 11.) At the same time, the vendor announced its preliminary third-quarter results with revenues of $108 million, down from $159 million in the same period last year. (See SGI Reports Preliminary Q3.)

These events prompted speculation that SGI could be snapped up by a hardware player looking to gain either the vendor's extensive customer list or its visualization and shared memory technology. (See SGI Opens Chapter 11.) SGI's rival ADIC, for example, was recently acquired by Quantum for a whopping $770 million. (See Quantum Takes Tape Rival ADIC and Quantum Buys ADIC.)Now, however, it looks as if SGI, and its efforts to boost its storage business, can continue unimpeded. "I would be surprised to see them acquired at this stage," says Tony Asaro, senior analyst at Enterprise Strategy Group. "It would have to be a company who is interested in both the server and the storage side of SGI's business."

McKenna, who took over as CEO from Robert Bishop in January, recently told Byte and Switch that he aims to grow the firm's storage business from 15 percent to 25 percent of revenues next year. This, he said, will be achieved by increasing the amount of storage sold with SGI servers and attacking new parts of the enterprise market, although the firm is yet to reveal its storage masterplan. (See SGI Looks to Jump Chapter.)

SGI has cranked up its storage story over recent months, unveiling its new InfiniteStorage 6700 and InfiniteStorage 10000 systems, as well as pushing the benefits of InfiniBand and 4-Gbit/s technology to the masses. (See SGI Delivers InfiniteStorage, SGI Sets New Standard, SGI Connects Servers, Storage, and SGI Pumps Up 4-Gbit/s SAN.)

Asaro sees no reason why the vendor cannot boost its storage story, especially after today's announcement. "Getting out of Chapter 11 mitigates the risk [for customers]," he says, adding that SGI needs to really motivate its salespeople to sell bundled servers and storage. "The challenge with selling storage is that they have got some formidable competition."

SGI's restructuring effort has not been without internal upheaval. Back in March, SGI cut 250 jobs (12 percent of its workforce) as part of its ongoing reorganization efforts. More recently, the firm reached a deal with Goldman Sachs enabling it to terminate the lease on its Amphitheatre and Crittenden Technology Centers in Mountain View, Calif.Last week, SGI revealed that it had won the support of its Official Committee of Unsecured Creditors for its reorganization plan. (See SGI Reaches Creditor Agreement.) SGI also confirmed that it received court approval for a $130 million financing facility with Morgan Stanley to fund the firm's day-to-day operations. (See SGI, Morgan Stanley Deal.)

James Rogers, Senior Editor, Byte and Switch