IBM International Business Machines Corp

By Aisha Al-Muslim 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 18, 2019).

Hewlett Packard Enterprise Co. agreed to buy supercomputer maker Cray Inc. in a $1.44 billion deal as part of its efforts to invest in high-performance computing.

HPE, the business-technology provider born from the 2015 split of Hewlett-Packard Co., said Friday it will pay $35 a share in cash for each Cray share, or more than a 17% premium to the stock's closing price Thursday.

Shares of Seattle-based Cray rose 23% to $36.52 on Friday, while HPE gained 0.6% to $14.62.

Cray, which designs supercomputers, traces its roots to 1972 when computer engineer Seymour Cray founded predecessor firm Cray Research, an early innovator in supercomputing. Its software runs high-performance computers used for scientific research and other projects requiring gargantuan computing power.

The company's competitors included International Business Machines Corp., Fujitsu Ltd., Dell Technologies Inc., Lenovo Group Ltd. and Huawei Technologies Co.

For HPE, the deal brings strong revenue flow from government-led supercomputing projects that have multiplied as competition in high-performance computing heats up between the U.S. and China. The San Jose, Calif. company would also expand a customer base typically made up of corporations; about 80% of Cray's business comes from government clients.

Cray, which doesn't produce the main processor chips for its machines, said this month that it is teaming up with Advanced Micro Devices Inc. to build a $600 million supercomputer for the Department of Energy's Oak Ridge National Laboratory. Earlier in the year, it booked another government order for a $500 million supercomputer in conjunction with Intel Corp.

Both systems are expected to surpass one quintillion calculations per second, making them the fastest in the world if others don't beat them to the punch.

"Answers to some of society's most pressing challenges are buried in massive amounts of data," HPE Chief Executive Antonio Neri said in prepared remarks. "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."

The Silicon Valley company has been trying to revamp its operations under a program it calls HPE Next, focusing its technical prowess and spending on such areas as data analytics and high-performance computing. The market for high-performance computing and associated storage and services is expected to grow to about $35 billion in 2021 from about $28 billion in 2018, HPE said.

Patrick Moorhead, president of the technology consulting firm Moor Insights & Strategy, said the play for Cray is consistent with HPE's stated goals. Its success, he said, hinges on the larger company's ability to integrate Cray's expertise and intellectual property.

Cray has U.S.-based manufacturing operations and about 1,300 employees world-wide. Its chief executive, Peter Ungaro, is slated to join HPE after the deal closes.

The company had revenue of $456 million last year, up 16% from 2017, but lower than the nearly $630 million generated in 2016. Gross profits have fallen over the past two years. Cray has forecast modest revenue growth and a "substantial" net loss for this year.

On a conference call Friday, Mr. Neri said Cray has bookings "way in excess" of total revenue. Noting that the two companies in some cases compete for the same business, he said growth prospects implied by broader technology trends also helped persuade HPE to make the purchase.

With the latest deal, HPE maintained its free cash flow outlook for its next fiscal year of $1.9 billion to $2.1 billion even after accounting for one-time integration costs. It also expects to save money by using proprietary Cray technology to lower costs and improve product performance.

HPE expects the deal to boost earnings in the first full year after the deal closes, which is expected by the first quarter of its 2020 fiscal year.

The company is due to report its fiscal second-quarter financial results Thursday.

Asa Fitch contributed to this article.

Write to Aisha Al-Muslim at aisha.al-muslim@wsj.com

(END) Dow Jones Newswires

May 18, 2019 02:47 ET (06:47 GMT)

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