Adaptec Faces Board Coup

Aggressive stakeholder has halted M&A and could unseat the board

July 6, 2007

3 Min Read
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Adaptec faces a board coup that could dramatically change the company.

A hedge fund named Steel Partners, based in New York, has become increasingly aggressive in its moves to revamp Adaptec. General Partner Warren G. Lichtenstein has acquired 13.8 percent of Adaptec's common stock and is pushing the company to replace five outgoing directors with his own men.

Steel Partners plans to unseat the existing board during Adaptec's annual shareholder meeting.

In an SEC filing dated June 25, lawyers for Lichtenstein indicate they'll nominate Jack L. Howard, John J. Quicke, John Mutch, Howard M. Leitner, and Anthony Bergamo -- all partners of Lichtenstein in a separate Steel Partners entity -- to take over five of the eight board positions that will be up for election at Adaptec's next shareholder meeting.

Further, if Adaptec's board opts to increase the number of open positions, Steel Partners will respond with more nominees.While no date has been set for the next meeting, last year's took place on September 14, 2006.

Steel Partners's move is no surprise. On May 29, after purchasing thousands of shares of Adaptec stock, Steel Partners's Lichtenstein wrote an open letter to the board, criticizing its management.

"As the largest shareholder in Adaptec we are disappointed and concerned with the Company's performance and current direction," Lichtenstein wrote. He cited "total operating losses of approximately $188.4 million" under the leadership of CEO Sundi Sundaresh.

"We believe the Board must take responsibility for these losses, particularly in view of the Board's decision to hire Mr. Sundaresh who had no prior experience as a Chief Executive Officer of a public company," the letter states.

Steel Partners's solution is to take over the Adaptec board and force changes that bring Adaptec's focus to its "core RAID business." The hedge fund has conducted similar strong-armed tactics at a diverse range of firms, including Angelica, a provider of linen services for restaurants and hospitals; Del Global Technologies Corp., which makes medical and dental imaging systems and parts thereof; and New Frontier Media, an adult entertainment firm.Spokespeople for Adaptec and Steel Partners, contacted for this story, did not respond at press time. But so far, the company shows little sign of deviating from its chosen strategy. CEO Sundaresh, hired in 2005, has divested products and properties in an attempt to reshape Adaptec as a maker of SAS and SATA gear. (See 2005 Top Ten: On the Hot Seat, Adaptec Says Sayonara to Systems, and Adaptec Sells Singapore Plant.)

Mergers and acquisitions have been a key part of the strategy. (See Adaptec Looking to Adapt.) But Steel Partners hasn't been impressed. Instead, Lichtenstein and company put the kibosh on further "ill-conceived acquisitions."

Reportedly, efforts by Steel Partners quashed Adaptec's plans to purchase Zantaz. Rumor has it, execs at Adaptec had spent months laying their own plans to buy the email archiving startup. (See Autonomy Acquires Zantaz for $375M.) But a better bid, coupled with Steel Partners's heavy-handed block, foiled their intentions.

"Adaptec is a very confused company at the moment," said one industry observer, who asked not to be named.

Another analyst says it's been on the cards. "There is a lot that Adaptec needs to do with what they've got before they step into something new," says analyst Brian Freed of Morgan Keegan. "They have been taking steps, but there's a lot more to go."Freed notes that Adaptec has lost money on an operational basis for nine quarters, and he thinks it will need strong medicine to survive, including "very significant" reductions in expenses and a revamping around a core focus.

The Steel Partners aren't going to back down, he thinks. "There's quite a battle brewing."

Mary Jander, Site Editor, Byte and Switch

  • Adaptec Inc. (Nasdaq: ADPT)

  • Morgan Keegan & Company Inc.

  • Zantaz Inc.

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