GigaBit Logic Inc., a Newbury Park maker of high-speed computer chips, is in talks to sell some of its excess production assets to a major customer, supercomputer maker Cray Computer Corp., in exchange for a sizable stake in Cray.
Cray, based in Colorado Springs, is in business largely to develop a supercomputer called the Cray-3. Supercomputers, which cost $15 million to $50 million, have ultra-fast data-processing abilities that are used mainly by scientists and researchers.
Cray Computer was created last November when the Cray-3 project was spun off by Cray Research Inc. in Minneapolis, the world’s biggest producer of supercomputers. Cray Computer is headed by Cray Research founder Seymour Cray.
GigaBit is one of several young firms trying to establish a major market for chips made with gallium arsenide, an advanced semiconductor material made from gallium, a rare element, and arsenic. The material enables the tiny electronic circuits to operate faster than those using the traditional silicon material that comes mostly from sand.
For the last four years, the Cray-3 project has largely used GigaBit’s chips (a Cray-3 uses about 90,000 chips). At times, Cray has accounted for 70% of GigaBit’s business, although it was less than that last year, GigaBit President John Heightley said, declining to be more specific.
Because it is privately held, GigaBit does not disclose its financial results. But Gene Miles, a consultant for Dataquest, a high-technology research firm in San Jose, estimated GigaBit’s 1989 sales at $17.5 million, and the overall gallium arsenide chip market at $88 million.
GigaBit said it is negotiating to sell its excess chip-making assets in exchange for 1.63 million newly issued shares of Cray Computer, which would represent just under a 10% stake in the company, Heightley said. Based on Cray’s closing stock price Monday, the stake has a value of about $5.7 million. But that value could drop because of the dilution that would be caused if the new shares are issued.
Miles said Cray’s interest in acquiring the GigaBit assets indicates that Cray is gearing up to start building commercial versions of the Cray-3. To date, Cray has used GigaBit mainly as a foundry to build gallium arsenide chips to Cray’s design specifications, said Cray Computer President Neil Davenport.
But if the deal goes through, GigaBit, in effect, would slice off a large part of its business, because Cray would be able to manufacture more of its own chips and therefore require fewer from GigaBit.
“Although we hope in the future to be able to still supply product to Cray Computer, it’s clearly going to be less than if we were the only supplier,” Heightley said. Asked why GigaBit is pursuing the deal, Heightley declined comment.
He did say, however, that GigaBit would more aggressively pursue increased sales in its other markets, selling its chips for other computers, electronic instruments and communications products.
Dataquest’s Miles said the deal could benefit GigaBit in other ways. “It takes some of the excess capacity that GigaBit has and gives them a cash equivalent in return that they can spend more wisely,” he said.
It’s also common for semiconductor users, such as Cray, to secure two or more chip producers, a strategy known as alternate sourcing, so they can obtain chips even if one supplier’s production is interrupted.
In the case of the Cray-3, Heightley said, the opportunity for GigaBit “to be their sole source through the life of that program just doesn’t exist.”