Original URL: http://www.theregister.co.uk/2009/09/22/adaptec_steel_partners/

Battle erupts in Adaptec boardroom

Hostile investor wants it sold

By Chris Mellor

Posted in Storage, 22nd September 2009 09:04 GMT

Analysis Struggling Adaptec faces a boardroom battle, as an activist investor attempts to force a company sale.

The story starts with Warren Lichenstein and his Steel Partners' hedge fund. They bought shares in troubled Adaptec in 2007, and waged a campaign to have the company sell itself and so release asset-value to shareholders.

Before this date, Adaptec's parallel server-storage adapters were facing decline from the rise in serial technologies. Attempts to grow Adaptec by getting into the NAS business through the 2004 acquisition of Snap Appliance for $100m were unsuccessful. It tried to sell the Snap business in 2005 when Adaptec's then CEO, Robert Stephens, retired, but couldn't find a buyer.

Incoming CEO Sundi Sundaresh then invested in the Snap line and new products were introduced. It was successful in a volume sense, but didn't do much for Adaptec's bottom line and the company continued to struggle.

Enter Steel Partners in 2007. There was a power struggle as Steel Partners fought for board representation and the opportunity to have Adaptec bought by another company. That also failed and there was an accord in October, 2007.

Adaptec's board was increased in size by one seat to nine positions. Steel Partners were given three of them with the rest occupied by so-called legacy directors, including Sundaresh. Jack Howard, co-founder of Steel Partners with Lichtenstein, became board chairman. His colleagues, John Mutch and John Quicke joined him on the Adaptec board. Both Steel Partners and Adaptec talked of increasing value for stockholders.

It seems though that the route to this for Steel Partners was financial engineering, whereas for Sundaresh and the other legacy directors it was product engineering and business strategy.

Next year, 2008, saw Sundaresh succeed in getting rid of the Snap business to Overland storage for $3.6m, closing the door on a $100m original investment and what must have been millions of product development dollars in between. It was deals like this that caused ESG's Steve Duplessie to comment that Adaptec bought companies, choked on them and then sold them for pennies.

A couple of months later, in August, Adaptec bought Aristos Logic for $41m and gained access to a scalable RAID controller ASIC (Application-Specific Integrated Circuit) business that, Sundaresh said, would help Adaptec strengthen its core business by increasing I/O performance and adding functionality to its controllers beyond RAID. The recent MaxIQ data conditioning announcement - in which Adaptec is adding a NAND flash cache to its controllers to speed I/O - is evidence that this strategy is coming to fruition.

Calendar 2008 didn't see Adaptec's fortunes improving. The recession struck that year and its financial 2009 results to March 31, 2009, showed annual revenues of $114.8m, down from the previous year's $145.5m. There was also an increased net loss of $14m, an unwanted increase on the previous years loss of $5.4m.

This year has seen renewed acquisition activity in the storage business, notably with EMC buying Data Domain for $2.1bn. It has also snapped up Kazeon for an undisclosed amount.

There are also signs that the recession is bottoming out and it appears that Steel Partners scents another opportunity to make a profit on its Adaptec investment; the smouldering boardroom feud looks like it is about to flare up again.

The six legacy board members - Jon Castor, Joe Kennedy, Bob Loarie, Lawrence Ruisi, Doug Houweling, and Sundaresh - met on their own around early September, and voted Howard out of his board chairman position, replacing him with Kennedy. They stated that they wanted to reduce the board to just seven seats, implicitly reducing the influence and power of Steel Partners.

Steel Partners responded by moving for a shareholder vote to also reduce the board to seven positions by ejecting Sundaresh and Bob Loarie. This is open warfare in board terms. The ousted chairman, Jack Howard, told Reuters in an interview that shareholder interests would best be served by selling Adaptec and releasing the value of the assets it owns, including 400 patents. He said that Sundaresh did not have a business plan that created a path to growth, thus dismissing the data conditioning idea.

Steel Partners also contends that the legacy board members and Sundaresh are planning a $100m plus acquisition. This has been denied by Doug Houweling, chair of the board's governance and nominating committee, in a letter to Lichtenstein. The letter described Steel Partner's proposals as hostile.

The Adaptec board, through this committee, sent a letter to shareholders. It said they should not consent to the Steel Partners' ideas as they were not in the best interests of Adaptec, and meant Steel Partners would gain control of the company

Although Steel Partners is pushing hard it only controls 11 per cent of Adaptec shares and so has to get a majority of the shareholders and their holdings on its side. It has to convince them that the legacy board, Sundaresh and his team have a rubbish plan for Adaptec and a crap history of running the company. The other directors have to say it was previous management that did the original damage, that Sundaresh is doing the right things - such as concentrating all of Adaptec on the core controller business - and that the recession has affected every company's results and not just Adaptec. Their message is 'have faith and things will improve'.

There are no signs yet of which way the shareholders will vote. But if Steel Partners has its way, Adaptec is for sale. ®