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Adaptec fighting Word War II

A house divided against itself cannot stand each other

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There has been a second outpouring of letters to shareholders as the Adaptec board and Steel Partners fight Word War II over the fate of CEO Sundi Sundaresh.

Steel Partners talks of his horrendous failures and the fight is turning on whether Sundaresh is seen as a value creator or destroyer.

Steel Partners alleges that, during Sundaresh's reign:-

* The Company`s Enterprise Value has steeply declined from approximately $200 million to below zero.

* The Company has spent over $200 million in R&D, yet revenues have sharply fallen from $344 million in FY 2006 to $115 million in FY 2009, a 67 per cent decline.

* The Company has lost money from operations every single year, with $270 million of total losses from operations, approximately $17 million in losses from the recent Aristos acquisition and $116 million in losses from prior acquisitions.

* The stock has underperformed its "peer group index" (as provided by the Company`s independent financial advisor) by approximately 100 per cent.

It says Sundaresh failed at two previous companies which he ran: Jetstream and Candera. He was President and CEO of Jetstream Communications from July 1998 to April 2002. At that point Jetstream announced "it could not continue operating as a stand-alone business. After three years under Mr. Sundaresh`s leadership, Jetstream lost all the backing of its venture capitalists and was forced to halt operations."

Steel Partners commented: "Frighteningly, his time at Jetstream bears striking similarities to his time at Adaptec."

Sundaresh then became CEO and president of Candera, a developer of next-generation network-based storage management platforms, on September 30, 2002. "Less than one year later, Candera closed its doors having gone through nearly $60m in funding with nothing to show for it. According to one analyst, "the problem was a) they didn't get much sales traction; and b) they didn't get any major OEM deals. It was really the lack of OEM deals that killed them." This had a "scary similarity to Adaptec!"

Steel Partners conclusion is that: "there is absolutely no way [Adaptec] can defend Mr. Sundaresh`s horrendous track record of stockholder value destruction."

Adaptec board disagrees

Adaptec's board takes a different view.

Firstly Adaptec's general situation has improved since Sundaresh became its CEO in 2005: "Today, Adaptec has cash and equivalents of more than $380m and has nearly eliminated its $224.5m in convertible debt. To get there, it sold or exited non-core businesses, raising approximately $80m in cash. It cut its combined R&D and SG&A expenses in half, from $125.9m in fiscal 2006 to $61.9m in fiscal 2009. And it improved gross margins from 30 per cent in Q1 of fiscal 2006 to 46 per cent in the last quarter."

Adaptec has "launched new products that are beginning to generate enough revenues to offset the expected decline of its legacy products... [and bought] Aristos Logic in 2008. These developments enabled Adaptec to capitalize on new market opportunities... that included virtualisation, cloud computing and 'green IT.'"

It "generated cash from operations in the last quarter of $4.6 million, resulting primarily from expense reductions, despite the decline in legacy sales. Since Sundi Sundaresh took the helm as CEO, the company earned GAAP net income of about $4m (contrary to Steel’s misinformation). For a similar period prior to Mr. Sundaresh’s appointment, GAAP net losses totalled $240m."

Regarding the Jetstream and Candera failures, these were actually successes.

At Jetstream Sundaresh "successfully executed the company’s strategy and increased revenues, only to have that effort disrupted by the 2001 telecommunications industry collapse that battered Jetstream’s customers and OEMs... Sundaresh advised the Board that the best course was a sale of the company."

At Candera Sundaresh's mission was to determine whether the company had a future. Again Mr. Sundaresh made the tough decisions consistent with the board’s charge to maximize the stockholders’ dwindling value.

Sundaresh has done well at Adaptec and, in contrast, Steel Partners' board representatives have been: "neither productive nor constructive in the two years that [they] have been on the Adaptec Board," and "Steel representatives repeatedly made threats that disrupted, and continue to disrupt, Board meetings." Steel Partners is "a desperate hedge fund with a dismal recent investment track record."

We learn that the Adaptec board appointed a financial advisor in April this year to look at possibilities of returning cash to shareholders, making an acquisition or selling the company. The latter option required much investigation and the advisor has not yet reported.

Six months seems a long time to decide such a matter.

The board says Steel Partners wants to sell the company into a depressed market at a fire-sale price to meet its own cash needs - having made steep losses - or to use Adaptec's cash for other reasons. In principle the board would accept a sale at the right price.

Steel Partners want Adaptec's shareholders to dump Sundaresh from the board and appoint its own representatives to control the board. The existing board wants shareholders to stick with it because they will have jam on their Adaptec bread tomorrow. Steel Partners thinks they'll have egg on their faces instead.

Both parties have cited proxy advisors supporting their positions. The vote on the various proposals takes place at Adaptec's annual meeting of stockholders on November 10. ®

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