Thursday, October 8, 2009

Fighting for Adaptec's cash (ADPT)

There's a nasty fight going on between storage firm Adaptec's (ADPT) shareholders and certain legacy directors, and it's quite ugly. As I've written previously, sometimes shareholders are right to step in when company assets would be worth more in a sale than they are under current management.

On October 6th, Adaptec management sent a letter to shareholders, urging them to reject proposals from major shareholder Steel Partners:

Your rejection of Steel Partners' proposals will enable us to continue the progress that Adaptec has made. It will ensure that Adaptec does not become subject to the whims of a hedge fund that is under pressure from its own investors.

Steel Partners says it wants more power on the Board so it can dispose of our technology business that is just now gaining traction. Steel says it then would "monetize" the remaining assets -- though it does not say how it would accomplish that goal or what it would do afterwards. Is it possible that the reason for Steel's secrecy about its plans to "monetize" the business is that its real plan might be too risky and self-serving to be made public? Is it a plan borne out of desperation caused by its troubled fund?

We believe Steel Partners' plan is to turn Adaptec into a corporate shell to be used to enter into a wholly new line of business unrelated to Adaptec's current business. In discussions with the Company's management, principals at Steel Partners indicated that they see Adaptec as a ready source of cash -- over $350 million -- that would allow them to pursue other investment opportunities in a range of industries. Whatever Steel Partners' goal is, they should not conceal that from you.

Among Steel Partners' criticisms:

What cannot be disputed is that Adaptec's performance has been miserable. In the June 2009 quarter, revenue dropped 31% and operating losses increased from $2.5million to $4.56million.

More important than the operating results is the balance sheet, and that's what the big fight is over.

Steel Partners fears that inept management, unable to profitably run its own business, will use the company's enormous cash stash to buy another company. Steel Partners cites the opinion of an external advisor that the best way to optimize value at Adaptec is to sell the operating business to a larger entity that might run it better, thus making it worth more. Whether the remaining assets represent a "shell company," as management frets, it'll probably be worth more to shareholders than the current value-destroying entity.

The market has voted, as Adaptec's stock price has (at times) traded below the company's cash position. That is generally a vote of ZERO confidence, or at least a vote that the operating business is worthless under current management. I'd say Steel Partners is correct here.

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