In a daring and controversial move that could put it in the front ranks of the computer industry's most dynamic segment, Silicon Graphics Inc. has agreed to acquire MIPS Computer Systems in a stock swap valued at $333 million.
The combined company will have revenue of about $1 billion a year and an impressive array of cutting-edge computer technologies. But the acquisition could undermine MIPS' effort to make its computer-on-a-chip a standard for next-generation personal computers, and financial analysts fear that the deal will dilute Silicon Graphics' earnings.
Wall Street surprised Silicon Graphics Chief Executive Edward R. McCracken with a negative reaction. Silicon Graphics was the volume leader on the New York Stock Exchange, where its shares fell $4.75 to $21.875. MIPS, the heaviest traded issue over the counter, closed up $2.50 at $13.50.
MIPS was a pioneer in the development of high-speed computer chips that use reduced instruction set computing (RISC) technology. Rather than build chips, MIPS licenses the design to semiconductor manufacturers, which sell the chips to MIPS and other companies.
But MIPS has had less success than expected gaining broad support for its design, even after Compaq, Microsoft, Digital Equipment and many other firms agreed last year to back the MIPS design via the new Advanced Computing Environment (ACE) consortium. MIPS, which also builds computers, has been only marginally profitable, and some have questioned its long-term prospects.
Silicon Graphics, a fast-growing vendor of sophisticated computers that feature state-of-the-art graphics, uses the MIPS chip throughout its product line. Thus, many analysts viewed the deal as a defensive move aimed at keeping MIPS chips competitive with RISC offerings from IBM, Hewlett-Packard, Digital Equipment and Sun Microsystems.
While the chips are now used primarily in workstations targeted at engineers and power-hungry business customers, all the RISC vendors hope that their products will form the brain inside the next generation of personal computers. Most PCs today are powered by microprocessors from Intel Corp.
McCracken acknowledged that a reason for the deal was to assure the long-term viability of the MIPS design. But he emphasized the synergies that could flow from the combination of a computer system vendor and a leading chip design company. He said the combination would create "a powerhouse technology supplier for the 1990s."
Under the plan, Silicon Graphics will establish a subsidiary called MIPS Technologies Inc. to handle licensing of the design to computer vendors and relationships with chip makers. The structure is aimed at assuring other MIPS customers--some of whom compete with Silicon Graphics--that MIPS will remain a "vendor-neutral" supplier of chip technology.
The deal is to be completed in June. McCracken said there would likely be limited layoffs and a restructuring charge but it is too early for details. Robert C. Miller, chairman and CEO of MIPS, will stay on as head of the MIPS Technologies unit.
Financial analysts were skeptical of Silicon Graphics' contention that the earnings per share of the companies will not decline next year. They also questioned whether companies that use MIPS chips will regard the new entity as a neutral technology supplier rather than as a competitor.
As Gary Smaby, president of the Smaby Group, noted: "If they don't have favored influence over the technology development, then what's the point?"
The issue of neutrality has dogged Sun, which licenses its SPARC chip design to other companies but has failed to persuade the industry that SPARC is vendor-neutral. Compaq is a leading member of the ACE group and has committed to building MIPS-based machines. But after buying a 13% interest in Silicon Graphics when ACE was formed, Compaq sold back the stake last year as it refocused on its core PC business.
Still, some analysts were positive about the deal. And the new entity should be able to avoid cultural conflicts that often undermine mergers. The firms are located just a few miles apart in Silicon Valley, were founded around the same time and both trace their roots to Stanford University's computer science department.