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SGI finds partner to help Cray come back

The troubled computer maker selects a financial firm to help it get its Cray supercomputer unit on its own feet.

Silicon Graphics has selected a financial partner to help the troubled company get its Cray supercomputer unit on its own feet, the company said.

In a separate announcement, SGI announced that it will develop a supercomputer with the National Security Agency.

The computer maker, in the midst of a seemingly interminable restructuring plan, has found the partner and now is settling the details of how control over Cray will be split up, said Beau Vrolyk, head of SGI's hardware and software products. Vrolyk declined to say who the financial partner is or when the deal will be finished.

"We're not trying to sell Cray. We're re-establishing it as an independent company," Vrolyk said in an interview. "SGI isn't a bank. What we need is a financial partner."

Spinning off Cray, which SGI acquired in 1996 for $576 million, is one of several measures announced August 10 when SGI embarked on a plan to pare itself down and retreat to its specialty of high-performance, often graphics-oriented machines. In its heyday, the Mountain View, California, company was renowned for these machines.

"Radically diversifying its product line from Nintendo 64 games to the Cray vector supercomputer...was one of the most serious strategic mistakes the company made," Vrolyk said. "What we're doing is reversing that strategy."

A novel customer win
Like a shot in the arm for SGI and its Cray efforts, SGI announced that the secretive National Security Agency has entered into an agreement to develop a next-generation Cray SV2 supercomputer over the next three years. The NSA, the U.S. spy agency responsible for electronic eavesdropping, has an insatiable appetite for computers that can perform laborious tasks such as breaking codes by brute force.

Under the deal, the NSA and Cray each will pay for half of the development costs of the SV2, Vrolyk said. The model will be a successor to the Cray SV1, which SGI began shipping in volume earlier this month.

SGI had to do a little persuading to get the NSA to participate in the announcement, Vrolyk said, but "it's such an important sector for the intelligence community that they're willing to come a little bit out of the closet and endorse it," he said.

The NSA has a 17-acre facility filled with many different computers, including Cray T3D and T3Es, Connection Machines from the now-defunct Thinking Machines, and Compaq's latest 32-processor Alpha number crunchers, a source familiar with the operation said.

Cray makes "vector" supercomputers--a type of computer that's good at a particular type of mathematics called vector calculations, Vrolyk said.

Cray's biggest competitors for vector machines are NEC and Hitachi in Japan, but customers such as the Defense Department or the NSA need U.S. producers because of government procurement regulations and national security reasons.

Roughly 60 percent of Cray machines are purchased by the government, and many of the others support government contracts, Vrolyk said.

Vrolyk likened the Cray spinoff to SGI's successful Mips, its CPU design team that now is a publicly traded company. However, because revenues from Nintendo products put Mips in better financial shape than Cray is in now, SGI was able to retain more control over Mips than it will with Cray, he said.

He declined to say whether Cray was profitable on its own, but said SGI has succeeded in turning around the division's fortunes. "Cray was losing a lot of money when SGI bought it," he said.

Punishing SGI
"The market rewards focus, and it punishes diversification in a very massive way," Vrolyk said of SGI's disparate product line. However, the market also punished SGI when it announced its plans to cut back that diversification, sending the stock down about 25 percent from 16 to its current level near 12.

The paring back of SGI includes several actions. The company is in the process of setting Cray up on its own, spinning off its MediaBase software division, handing off its Windows NT graphics workstation business to a company better able to market and distribute the products, and cutting another 1,500 or so jobs from the company. Shortly after then-chief executive Rick Belluzzo announced the restructuring, SGI's stock dropped and Belluzzo left SGI to take a new Internet job at Microsoft.

Bob Bishop, an SGI board member and former executive, took over as CEO and rallied the troops around a message of remaking SGI in the image of the company five years earlier.