Big news emerged on the M&A front this morning when Hewlett Packard Enterprise (HPE) announced that it will acquire Cray (CRAY) for $35 per share in cash for a total value of $1.3 bln, net of cash.
Cray is a major supplier of supercomputers for governments, academia, and commercial entities. Specifically, Cray focuses on "the high end of the high-performance computing (HPC), data analytics, and AI markets... These products include compute systems commonly known as supercomputers, as well as high-performance storage, data analytics, and AI solutions," according to its 10-K filing. Cray sells its products individually or as part of integrated offerings. It also provides "related software and system maintenance, support, and engineering services."
Its supercomputers are used to analyze huge swaths of data for a number of applications: government research labs, national security/cybersecurity, weather forecasting, oil and gas (seismic data analysis), financial trading (algorithms), genomic sequencing, and more. Of note, over half of the world's global weather centers run on Cray supercomputers.
A few years ago, Cray changed its strategy. The company made a push to lessen its reliance on its traditional government and academic customers and to expand into the fast-growing commercial, storage, and Big Data verticals. A combination with HPE should only accelerate this transition and open up Cray to more major customers, as HPE will be able to layer in Cray's supercomputers with its current HPC products (HPE Apollo and SGI) to really create an impressive end-to-end HPC offering.
Clearly, HPE is making a bet on the market wanting to analyze more and more data. According to the press release announcing the acquisition, the "explosion of data from artificial intelligence, machine learning, and big data analytics and evolving customer needs for data-intensive workloads are driving a significant expansion in HPC." Specifically, it cites the Exascale opportunity, "a growing segment of overall HPC opportunities [with] more than $4 billion of Exascale opportunities expected to be awarded over the next five years." Of note, the press release says that Cray recently won a $600 mln Exascale supercomputer contract with the DoE.
In sum, the deal seems to make sense for both parties. HPE will get a nice boost to its HPC product offering, and it will help HPE compete better in the burgeoning Exascale market. Also, the 17% premium HPE is paying seems pretty modest and reasonable.
It's a good development for Cray shareholders as well as they get to see a nice boost in the stock price, and it's a nice exit strategy for them as Cray has been struggling lately. Cray has missed EPS consensus estimates in each of the past three quarters. It's always an adventure around earnings with Cray as its business is so lumpy. The company's business revolves around very expensive machines, and the timing of orders can unexpectedly get pushed out, leading to volatility in the stock price.