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Rackable free to pick SGI carcass

Court OKs $42.5m buy

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Niche server maker Rackable Systems said this morning that the U.S. bankruptcy court in New York handling the Chapter 11 proceedings for supercomputer maker Silicon Graphics has approved Rackable's acquisition of most of the assets of SGI.

Under the deal that was announced on April 1, the same day that SGI filed for bankruptcy protection, Rackable said it would be shelling out $25m to acquire most of the assets of SGI as well as assuming "certain liabilities" that were not specified. In the announcement today, that figure has risen to $42.5m in cash. The liabilities that Rackable is assuming have not been detailed.

"We are pleased with today's news," said Mark Barrenechea, president and chief executive officer at Rackable in a statement. "With this acquisition, Rackable will be positioned to solve the most demanding business and technology challenges our customers confront today. We believe we will have a stronger company with differentiated product lines and professional services; reaching commercial, government and scientific sectors on a worldwide basis."

Rackable had $171.9m in cash as its fiscal 2008 year ended on January 3 and can certainly afford to pay more money for SGI's assets. In mid-February, when it reported its full year 2008 results, with sales down 29.4 per cent to $247.4m and a net loss of $31.3m, the company said its board had allocated $40m to share buybacks and that it would allocated as much as $17m on additional R&D, sales, and marketing spending in fiscal 2009.

When the SGI deal was announced, the share repurchases were canceled and the company had buy SGI without hitting its cash pile too hard. This is a good way to acquire some very good technology and a fairly large customer base on the cheap.

Not that Rackable has it easy now. The company has cut its employee ranks twice in the past year as business for its dense, rack-based server products have plummeted in the face of the economic meltdown, from 378 down to 270. And it remains to be seen what people will make the jump from SGI to Rackable when this deal is completed on or around May 8. And SGI's own business has been on the rocks, with sales of $348.5m in the twelve months of calendar 2008 and losses of $157.8m.

Rackable reports its first quarter fiscal 2009 financial results on May 5 after the markets close and will discuss its plans for integrating Rackable and SGI technology and people at that time. ®

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