The CEO of Hewlett Packard Enterprise explains how its $1.3 billion acquisition of Cray fits into the master plan — and why it could give it a boost with government customers (HPE, CRAY, AMZN, MSFT)

hewlett packard enterprise HPE ceo antonio neri

Hewlett Packard Enterprise CEO Antonio Neri told Business Insider that the $1.3 billion deal to buy legendary supercomputer manufacturer Cray will boost HPE's strategy in the corporate tech market.
He said the acquisition would also enhance HPE's position in the government market, where it has often lost to Cray.
Analysts say Cray would give HPE access to more intellectual property that could lead to a stronger market position.
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Hewlett-Packard Enterprise CEO Antonio Neri says buying Cray will provide the tech giant's cloud strategy more supercomputing muscle. It would also give it an edge in an arena where Cray had been HPE's stiff rival: government contracts.

The $1.3 billion deal, which was unveiled Friday, highlights the Silicon Valley company's bid for a stronger position in the corporate tech market where competition is increasingly focused on offering more robust, but cost-efficient, computing power to process enormous amounts of data. This trend is underscored by the battle for dominance in cloud computing, high-performance computing and AI.

"Data is exploding all around us and that data has value," Neri told Business Insider. "This was the right time to make this acquisition."

Founded in 1972, Cray is a supercomputing pioneer, and was once one of the preeminent names in the mainframe industry. The Seattle-based company is known for selling sophisticated machines that do high-speed data-crunching and analysis to federal agencies, including national labs, universities and big corporations, including in the oil and gas and manufacturing industries.

Just recently, it announced that it's working with chip maker AMD to build a new supercomputer for the Department of Energy that's capable of making a quintillion calculations a second for computational work in various fields, such as weather, genomics, and physics.

In fact, Cray is a heavy-hitter when it comes to government and publicly-funded supercomputing projects where it has routinely outbid HPE. A big chunk of Cray's revenue, roughly 80%, comes from government contracts, and only one-fifth is from commercial deals, according to HPE.

It's the opposite for Hewlett Packard Enterprises, which only gets one-third of its business from government contracts, Neri said. "We're still competing until the transaction closes," he added.

But this merger would change that.

"We win and they win," he said. "The good news is we can both win."

Changing times

Whether buying Cray will help HPE win in a changing market is less clear.

The company, the product of a 2014 split of Hewlett-Packard, has struggled in key areas of cloud computing, which allows customers to rent functionally unlimited supercomputing power over the internet, drastically reducing IT costs since they don't have to build their down data centers.

HPE withdrew from the public cloud market now dominated by Amazon Web Services and Microsoft Azure. Instead HPE has embraced a hybrid cloud strategy — essentially, offering products and services that integrate its own servers and data center hardware with the major cloud computing platforms.

Under Neri, HPE is also focused on edge computing, which makes fast, intensive data processing possible within a device itself, while relying on the cloud only for the most intensive calculations. In both strategies, AI is also a key component.

Buying Cray could give HPE access to more technological firepower to pursue a hybrid cloud and edge computing strategy, which would require access to a formidable intellectual property arsenal.

Cray is a "legendary company" in the supercomputing arena, Constellation Research analyst Ray Wong said.

The acquisition "puts HPE at the top of the supercomputing food chain," Constellation Research analyst Ray Wang told Business Insider. "There aren't many players left and this is the last crown jewel in consolidation."

He said the merger could also give HPE a lift in quantum computing, the emerging trend in technology that would give systems exponentially more computing power, allowing for even faster computations and analyses.

"With quantum computing on the horizon, the investment in quantum will also require a big investment," Wang said. "The good news is Cray has an extensive set of IP and patents to add to HPE's tool box."

IDC President Crawford Del Prete offered a similar view.

"This is about HPE identifying an area of the enterprise where they can gain access to high value IP and customers," he told Business Insider. "While Cray has not been profitable, it gives HPE the opportunity in increase its set of assets in the supercomputing space."

An edge in edge

HPE's push for a stronger position in edge computing could also get a lift from the merger, he added.

"As the edge grows it will create massive amounts of data,"he said. "That data will need to be ingested and processed, in some instances, with supercomputers or systems with those kinds of capabilities. This is where Cray could help."

Analyst Roger Kay of Endpoint Technologies Associates was less upbeat about the deal, as he downplayed the benefits of hardware acquisitions. He also didn't see Cray boosting HPE's chances in hybrid cloud and edge computing.

"I'm not too keen on proprietary hardware at this point," he told Business Insider. "It's difficult and expensive to keep up to date. ...HPE is down the ranks in hybrid cloud. Cray won't help with edge, at least not as I understand it. Given HPE's existing technology portfolio, I'm not seeing why they need this acquisition to move forward in that market."

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