Adaptec stockholder Steel Partners cites Glass Lewis in proxy fight

By Susanna Moon

Chicago, Oct. 12 - Steel Partners II, LP said Glass Lewis & Co. issued a proxy report in which it stated that Steel Partners has "correctly identified a pattern of underperformance" at Adaptec, Inc. and that "the company's deteriorating financial performance and poor handling of the recent Aristos Logic acquisition call into question whether the company's board has provided sufficient oversight in recent years."

Glass Lewis agreed that Adaptec's financial results and underperformance warrant a change to its board and management team, according to a press release by Steel Partners.

"Importantly, Glass Lewis acknowledges certain failures of the company under the control of the legacy directors and Mr. Sundaresh that have led to steadily declining revenue, large and continuing operating losses and a continued decline in the market value of the company's stock," the company said in the release.

Glass Lewis also was "troubled by the company's execution of the acquisition of Aristos Logic' and is concerned that 'this acquisition has contributed to the company's recent losses," the company noted.

Glass Lewis "missed the mark" on some critical issues, the release continued.

First, the proxy adviser failed to consider that the full board approved hiring a nationally recognized investment bank to evaluate options to maximize shareholder value, Steel Partners said. The company's financial adviser recommended the possible sale of its operating business, intellectual property and real estate and to "redeploy the capital in a way to maximize the value of the net operating loss carry forwards."

A majority of the board approved going forward with the recommendation while legacy directors Sundaresh, Kennedy and Loarie voted against it, the company noted.

"Unfortunately, Glass Lewis failed to appreciate that this consent solicitation is not about Steel Partners substituting its judgment regarding the timing of strategic transactions for that of the board. It is about our commitment to follow the board-approved recommendation of the company's independent financial advisor, which Mr. Sundaresh and certain legacy directors now oppose in favor of continuing to run the company's failing operating business while pursuing a risky, large-scale acquisition.

"In saying that 'it would be premature to push through a sale of the company without first taking steps to rectify the company's performance problems,' Glass Lewis is essentially substituting its own judgment for that of the company's financial advisor, who conducted a comprehensive strategic review process, and the board of directors.

"It also appears that Glass Lewis did not give appropriate consideration or weight to the massive corporate governance failures at Adaptec under the control of the legacy directors. Specifically, the proxy report fails to take into account that they:

• Took hostile actions against director representatives, Jack Howard and John Quicke, to diminish the company's influence on the board and preserve Sundaresh's position as CEO;

• Refused to waive the nomination deadline to avoid the consent solicitation and allow stockholders to have a choice and level playing field at the annual meeting;

• Permitted Sundaresh to personally recruit three new director nominees who collectively lack experience and qualifications to serve on the board; and

• Own less than 1% of the company's outstanding shares and have little "skin in the game."

"Unfortunately, rather than hold accountable the legacy directors, who have effectively controlled the board for the past several years, Glass Lewis instead notes that the company's operational performance has not improved since our director representatives joined the board.

"We are disappointed that Glass Lewis failed to recognize the positive impact our director representatives have had on the board since December 2007 despite the oppressive control of the legacy directors. Among other things, Messrs. Howard and Quicke have:

• Pushed management to come up with a business plan that would generate growing revenues and eliminate operating losses in order for the company to become profitable;

• Recommended on several occasions the return of capital to Adaptec stockholders through stock buybacks at less than cash value; and

• Moved the company toward pay for performance for senior management, using restricted stock awards that vest based on meeting performance-based criteria, versus the previously granted time-based restricted stock.

Steel Partners said it recommends that all Adaptec stockholders return the white consent card and urged them not to revoke the consent by signing any gold consent revocation card sent by Adaptec.

On Oct. 1 Steel Partners told fellow Adaptec, Inc. shareholders it is "time to set the record straight" regarding statements made by the company's legacy directors.

According to Steel Partners' lengthy open letter to shareholders on Thursday, Adaptec's directors are trying to distract shareholders from the directors' "record of failure and massive destruction of stockholder value" with "misleading propaganda, half-truths and disinformation."

Steel Partners said that since Subramanian Sundaresh became chief executive officer of Adaptec in November 2005, the company has recorded total operating losses of about $270.9 million and net revenue has fallen about 70% to approximately $114.8 million since fiscal year 2006.

Adaptec vote recommendation

On Tuesday, Adaptec asked shareholders not to respond to Steel Partners' consent solicitation and to mark the "Yes, Revoke My Consent" boxes on the gold consent revocation card.

Adaptec said Steel Partners is seeking to remove Sundaresh from the board of directors in order to control the seven-member board without paying a premium to other stockholders, a claim Steel Partners denied.

Steel Partners has an approximately 10% interest in Adaptec, a Milpitas, Calif., data storage company, the company said.

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