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Rackable Systems shares rose as much as 5% late last week on speculation the data systems storage specialist might be acquired by No. 2 PC maker Dell. The shares have since subsided as investors as the market digested the fact that Dell, which has resold storage products for years from listed EMC of Massachusetts, was an unlikely bidder.
Representatives of Milpitas, California-based Rackable did not return calls. A Dell representative said the company would not respond to market speculation.
Texas-based Dell reported fourth quarter storage sales rose to USD 600m, out of overall revenue of USD 14.4bn, in part because it sold into Rackable’s sector. EMC, for its part, has abided by CEO Joe Tucci’s dictum to cease acquisitions after a long spree.
Dell, with a market capitalization of USD 57.1bn, is scheduled to report first quarter results on 31 May. Due to a US government probe into options and other practices, Dell has been unable to report complete financial results for nearly 12 months. The company removed its CEO and CFO earlier this year as Chairman Michael Dell returned as CEO. The company historically has made only smaller acquisitions in gaming and networking.
Other computer makers that sell into Rackable’s sector include listed Sun Microsystems and Hewlett-Packard of California and IBM of New York, as well as listed storage maker Network Appliance of California.
Even with today’s surge in Rackable shares, which give it a market capitalization of USD 358.6m and enterprise value of USD 174m, the shares are off nearly 70% in the past year. Perhaps as a result, hedge funds including GLG Partners, Galleon Management, Tiger Management and Peregrine have accumulated a combined share around 15%.
Since its IPO in June 2005, Rackable’s biggest holders had been the Fidelity and Franklin Templeton mutual fund groups with a combined 25%.
Rackable has lost some of its cost advantage because it relied upon the Opteron chip from listed Advanced Micro Devices in its servers. The chip was priced below competing chips from listed Intel used by EMC and others. But over the past year, Intel has achieved an earnings turnaround with its competing Core Duo line sold to all of its computer customers.
After reporting a first quarter loss of USD 10.2m as revenue slipped 15% to USD 72m last month, Rackable replaced CEO Tom Barton and promoted director Mark Barrenechea to succeed him. That followed the departures of the company’s president and sales chief.
Rackable’s biggest customers have been listed Microsoft, Yahoo, Amazon.com and eBay. But last year, the latter two fell off its biggest customer list, while Microsoft accounted for 34% of revenue and Yahoo for 26%. There has been separate speculation Microsoft might acquire Yahoo to better compete against listed Google in the search and advertising sector. Google itself is one of the top storage and server buyers.
If the company were to go on the auction block, there are several experienced executives on hand: director Charles Boesenberg has been CEO of two listed companies that were acquired: NetIQ, acquired by private Attachmate in 2006, and listed MIPS Computer, acquired in 1992 by listed Silicon Graphics.
New CEO Barrenechea had previously been EVP and Chief Technology Officer of listed CA of New York, the No. 2 mainframe software provider that grew through dozens of acquisitions under prior CEOs Charles Wang and Sanjay Kumar. As well, new Rackable COO Gautham Sastri last year sold his private company, Terrascale Technologies of Montreal, to Rackable, pocketing more than half the USD 39m in proceeds.
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