HP Enterprise announces agreement to acquire SGI for $275M
SGI, a global vendor in high-performance solutions for compute, data analytics, and data management, announced that it has signed a definitive agreement to be acquired by Hewlett Packard Enterprise for $7.75 per share in cash, a transaction valued at approximately $275 million, net of cash and debt.
SGI products and services are used for high-performance computing and big data analytics in the scientific, technical, business and government communities to solve challenging data-intensive computing, data management and virtualisation problems. The company has approximately 1,100 employees worldwide, and had revenues of $533 million in fiscal 2016.
The explosion of data in volume and variety, across all sectors and applications is driving organisations to adopt high-end computing systems to run compute-intensive applications and big data workloads that traditional infrastructure solutions cannot handle. This includes investments in big data analytics to quickly and securely process massive data sets and enable real-time decision making. High-end systems are being used to advance research in weather, genomics and life sciences, and enhance cyber defenses at organisations around the world.
As a result of this demand, according to IDC, the $11 billion HPC segment is expected to grow at an estimated 6% to 8% CAGR over the next three years, with the data analytics segment growing at over twice that rate.
SGI’s highly complementary portfolio, including its in-memory high performance data analytics technology, will extend and strengthen HPE’s current position in the growing mission critical and high performance computing segments of the server market. The combined HPE and SGI portfolio, including a comprehensive services capability, will support private and public sector customers seeking larger supercomputer installations, including US federal agencies as well enterprises looking to leverage high-performance computing for business insights and a competitive edge.
HPE and SGI believe that by combining complementary product portfolios and go-to-market approaches they will be able to strengthen the leading position and financial performance of the combined business. Overall, HPE expects the acquisition to be neutral to earnings in the first full year following close and accretive thereafter. The transaction is expected to close in the first quarter of HPE’s fiscal year 2017, subject to regulatory approvals and other customary closing conditions.
“Our HPC and high performance data technologies and analytic capabilities, based on a 30+ year legacy of innovation, complement HPE’s industry enterprise solutions. This combination addresses today’s complex business problems that require applying data analytics and tools to securely process vast amounts of data,” said Jorge Titinger, CEO and President, SGI. “The computing power that our solutions deliver can interpret this data to give customers quicker and more actionable insights. Together, HPE and SGI will offer one of the most comprehensive suites of solutions in the industry, which can be brought to market more effectively through HPE’s global reach.”
“At HPE, we are focused on empowering data-driven organisations,” said Antonio Neri, Executive Vice President and General Manager, Enterprise Group, Hewlett Packard Enterprise. “SGI’s innovative technologies and services, including its best-in-class big data analytics and high performance computing solutions, complement HPE’s proven data center solutions designed to create business insight and accelerate time to value for customers.”
Fitch advisory on SGI acquisition by HPE
Hewlett Packard Enterprise’s acquisition of SGI does not affect HPE’s ratings, according to Fitch Ratings. Fitch most recently affirmed HPE’s ratings on May 26, 2016, following the company’s announcement it will spin-off the Enterprise Services segment.
HPE is already an original equipment manufacturing customer of SGI and will enable larger supercomputer installations with comprehensive services offerings. The acquisition should augment HPE’s top line, as Fitch expects high performance computing and data analytics markets to grow in the mid-single and low teens over the intermediate term, respectively.
SGI’s revenue for fiscal 2016 ended June 24, 2016 grew 2.2% to $532.9 million, while operating EBITDA was a Fitch estimated $21.9 million. Fitch expects HPE will leverage its distribution platform to drive SGI’s 4.1% operating EBITDA margin closer to HPE’s mid-teens core EBITDA margin over the intermediate-term.
HPE entered into a definitive agreement to acquire SGI for a total cash consideration of $275 million, net of acquired cash and debt. For the quarter ended June 24, 2016, SGI had $92.9 million of cash and cash equivalents and $64.5 million of total debt.
Fitch believes the acquisition fits in with HPE’s technology-focused tuck-in acquisition strategy, although acquisitions have been minimal more recently as the company focused on its split from HP Inc. Fitch believes the vast majority of HPE’s $9 billion of cash and cash equivalents as of April 30, 2016 was located offshore. Still, Fitch believes the company can fund the deal with domestic free cash flow or proceeds from the ES spin-off, also targeted for the beginning of fiscal 2017.
HPE’s current Rating Outlook is Stable.
Levi & Korsinsky investigating SGI acceptance of HPE offer
After the announcement of HPE’s intent to acquire SGI, Levi & Korsinsky, LLP has commenced an investigation into the fairness of the sale of Silicon Graphics International to Hewlett-Packard Enterprise Company. Under the terms of the transaction, SGI shareholders will receive $7.75 for each share of SGI stock they own.
The investigation concerns whether the Board of SGI breached their fiduciary duties to stockholders by failing to adequately shop the Company before agreeing to enter into this transaction, and whether Hewlett-Packard Enterprise Company is underpaying for SGI shares. In particular, at least one analyst has set a price target of $8.50 per SGI share.
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