April 1, 2009 / 10:46 AM / 9 years ago

UPDATE 4-Rackable Systems to buy Silicon Graphics for $25 mln

* Silicon Graphics files for Chapter 11, agrees to sale

* Silicon Graphics lists total debt of $526.5 mln

* Transaction expected to close within 60 days

* Silicon Graphics slump 81 pct; Rackable Systems down 11 pct (Adds background, updates to share closing)

By Bijoy Anandoth Koyitty

BANGALORE, April 1 (Reuters) - Server and data storage products maker Rackable Systems Inc RACK.O on Wednesday said it agreed to buy Silicon Graphics Inc SGIC.O, which filed for bankruptcy protection earlier in the day, for about $25 million in cash.

In a filing with the U.S. Securities and Exchange Commission, Silicon Graphics said it expects to pay off secured creditors with net proceeds from the sale.

Shares of Silicon Graphics, which provides servers, storage and related support, plunged as much as 81 percent, while those of Rackable Systems fell about 11 percent.

“While details of the transaction remain unclear, we view the acquisition as a long-term positive for Rackable Systems shares,” analyst Doug Reid of Thomas Weisel Partners wrote in a note to clients.

The acquisition will help Rackable Systems to get a foothold in the $7 billion low-end segment of the high-performance computing market, Reid said.

Sunnyvale, California-based Silicon Graphics has helped customers with high-speed computing tasks, such as tracking tornadoes and aiding in oil and gas exploration.

Silicon Graphics systems were also used to create the epic battle scenes in the movie version of J.R.R. Tolkien’s The Lord of the Rings and George Lucas’s Industrial Light & Magic’s design of the Jurassic Park III dinosaurs.

The deal will also help Rackable Systems diversify its customer base, and it is important since the company’s top 10 customers account for more than 70 percent of revenue, said Reid, who has an “overweight” rating on the stock.

For fiscal year ended Jan. 3, 2009, Rackable Systems’ top two customers were Microsoft Corp (MSFT.O), which contributed 14 percent, and Amazon.com Inc (AMZN.O), which accounted for 35 percent of its revenue. The government segment contributes about 40 percent of Silicon Graphics’ revenue.

BANKRUPTCY REVISITED

Silicon Graphics listed assets of $390.5 million and total debt of $526.5 million in its Chapter 11 filed in the United States Bankruptcy Court for the Southern District of New York, filings showed.

Silicon Graphics had earlier filed for Chapter 11 in 2006, citing declining revenue and increasing competition, and emerged from bankruptcy the same year.

    In the regulatory filing on Wednesday, Silicon Graphics said it filed for bankruptcy protection after it defaulted on a credit agreement with Morgan Stanley and other lenders.

    Silicon Graphics said the total principal amount of the outstanding obligations was about $141.7 million under the term loan and about $20.7 million under the revolving loan.

    DEAL TO CLOSE IN ABOUT 60 DAYS

    Silicon Graphics’ international operations would be part of the sale, but would not be part of the bankruptcy process, Rackable Systems said in a statement.

    Subject to a number of closing conditions, including the approval of the bankruptcy court and other uncertainties, the transaction is expected to close within about 60 days, Rackable Systems said.

    Rackable Systems, which went public in 2005, also said it had suspended its previously announced share buyback program of up to $40 million.

    Silicon Graphics, which reported a wider second-quarter net loss of $49 million, had said in February that its heavy debt load was hurting the company’s ability to win more business.

    The company listed Voltaire Inc, Intel Americas and Qimonda as its largest creditors.

    The company said it hired Houlihan, Lokey, Howard & Zukin Capital Inc as financial adviser and investment bankers, and law firm Ropes & Gray LLP as its bankruptcy counsel.

    Shares of Silicon Graphics closed down 56 percent at 18 cents Wednesday on Nasdaq, while those of Rackable Systems closed down 4 percent at $3.88. (Additional reporting by Saumyadeb Chakrabarty and Deepti Govind; Editing by Anil D‘Silva and Deepak Kannan)

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