Compaq, Silicon Graphics Terminate Computer Deal

Compaq Computer and workstation vendor Silicon Graphics said Tuesday that they have dissolved a much-heralded alliance established last April to develop a next-generation personal computer, with Silicon Graphics agreeing to buy back the 13% of its shares now owned by Compaq.

The move comes as Compaq’s new chief executive, Ekhard Pfeiffer, struggles to establish a new direction for the troubled company after the ouster of company founder Joseph (Rod) Canion late last year.

Though both firms denied it, the split is also likely to handicap the development of the Advanced Computing Environment initiative, a broad coalition of companies that is seeking to establish standards for the next generation of personal computers.

Shortly before the initiative was announced last spring, Houston-based Compaq agreed to pay $135 million for a 13% stake in Mountain View-based Silicon Graphics, a fast-growing firm that specializes in sophisticated graphics workstations. The two companies also agreed to share technology and collaborate on the development of computers based on a computer-on-a-chip from MIPS Computer Systems.

Silicon Graphics was one of the first companies to adopt the MIPS chip, a microprocessor that uses a technology called RISC that speeds computer operations. The MIPS microprocessor is the key component in one of the designs being proposed by the Advanced Computing Environment group, and Compaq saw the alliance with Silicon Graphics as a way to get a leg up in the development of MIPS-based systems.

Such machines would use a new operating system--the software that controls the basic functions of a computer--being developed by Microsoft, as well as a new version of another operating system called Unix. The machines were conceived as a way of creating a new class of high-powered computers while reducing PC companies’ dependence on Intel microprocessors.

But Compaq and Silicon Graphics could not reach agreement on what type of machine they would develop together and in what time frame.

“Their strategy has changed, and ours hasn’t,” said Mark Perry, executive vice president of Silicon Graphics. He pointed out, however, that Compaq had the rights to use technology developed with Silicon Graphics under a royalty arrangement, and that he expected Compaq to be a player in MIPS-based systems.

Silicon Graphics will buy back its shares from Compaq by next July for $150 million, and Compaq will make a final $3.75-million payment to Silicon Graphics.