HPE to Buy Cray in $1.3B Deal

Hewlett Packard Enterprise agreed to acquire Cray Inc. for $35 a share in cash, with the transaction valued at about $1.3 billion, net of cash. The proposed merger would add supercomputing system technology to HPE’s product portfolio, expanding its offerings in high-performance computing (HPC).

The HPC segment of the IT market, together with the associated data storage and services, is forecast to grow from about $28 billion last year to around $35 billion in 2021, HPE stated, with a compound annual growth rate of approximately 9%. Exascale computing is seen providing more than $4 billion in business opportunities over the next five years, the company added.

Cray is especially conversant in exascale technology. It is the lead contractor in building a new supercomputer for the Oak Ridge National Laboratory, a contract worth more than $600 million, and Cray is the subcontractor to Intel on constructing an exascale system for the Argonne National Laboratory. That supercomputing contract is valued at more than $500 million, with Cray’s portion of the project worth more than $100 million. Both projects are scheduled for completion in 2021, with full bring-up in 2022.

The transaction is expected to close by the first quarter of HPE’s fiscal year 2020, pending regulatory approvals and customary closing conditions.

“Answers to some of society’s most pressing challenges are buried in massive amounts of data,” Antonio Neri, HPE’s president and CEO, said in a statement. “Only by processing and analyzing this data will we be able to unlock the answers to critical challenges across medicine, climate change, space, and more. Cray is a global technology leader in supercomputing and shares our deep commitment to innovation. By combining our world-class teams and technology, we will have the opportunity to drive the next generation of high performance computing and play an important part in advancing the way people live and work.”

Mukul Krishna, global head of Practice, Digital Media Transformation, at Frost & Sullivan, takes a generally positive view of the proposed acquisition. “I don’t see any red flags,” he told Semiconductor Engineering. “I do see a lot of potential.”

The valuation of $1.3 billion seems fair, at a reasonable multiple of Cray’s market capitalization, he adds. In the past decade or so, the company’s market cap has been as low as about $500 million, while steadily rising up to early 2014, then experiencing peaks and valleys in the past five years.

Both companies have long histories—complicated in the case of Cray. HPE dates back to the formation of Hewlett-Packard Company before the Second World War. HPE and HP Inc. split in 2015, after many years of acquisitions and divestitures at the old HP company.

Cray dates back to Seymour Cray’s founding of Cray Research in 1972. Cray Research spun off Cray Computer in 1989, enabling Seymour Cray to continue work on the Cray-3 supercomputer model. Cray Computer closed down in 1995, filing for bankruptcy, and Seymour Cray died in 1996. Cray Research merged with Silicon Graphics, Inc. in 1996. A separate Cray Research unit was created by SGI in 1999. Tera Computer Company bought the assets of that unit in 2000 and renamed itself Cray Inc.

Whatever problems the old Hewlett-Packard had with some of its acquisitions, HPE deserves a better reputation, according to Krishna. “That was HP,” he says. “This is HPE. This is a new organization.”

With Cray folded into HPE, the combined company will be better able to command more government business, he adds. It should be able to compete with the likes of IBM and Dell for that market segment, among others. HPE will have “a very strong pedigree in the market,” Krishna comments. The proposed merger “brings them credibility,” he notes.

Combining the product lines of Cray and HPE shouldn’t be very complicated, with the wider use of open-source technology in the industry, Krishna concludes.

The high-performance computing market will enjoy a compound annual growth rate of 7.2% in the next few years, reaching $59.65 billion by 2025, Grand View Research forecasts. “The rising popularity among manufacturing companies, government departments, and defense agencies is particularly driving growth of the HPC market,” the market research firm stated in a report. “High-performance computing envisages a cluster of computers that can run long algorithms and solve complex problems and equations at speeds and accuracies higher than those offered by the conventional computing. Previously, HPC was used only by the navigation and aerospace industries. However, diversification of the IT industry, growing adoption of cloud computing, continuous developments in artificial intelligence, and the rising need for business analytics are prompting various end-use industries to adopt HPC.”

Zacks Equity Research agrees that with this buyout, Hewlett Packard can take advantage of the significant opportunities in the HPC market and compete against companies like IBM and Dell. “Furthermore, Cray’s Storage and Data Management segment, in which it has partners like Microsoft, is a profitable business.” writes the research firm in a Yahoo! News article.  “This indicates that with the buyout, Hewlett Packard will also boost its presence in enterprise-class server and storage markets, which are high-margin areas.”