Adaptec customers are beginning to be concerned about the future of the company.
They fear that an aggressive hedge fund is seeking to force Adaptec to return to its core RAID business, and away from its storage systems business and new secure information management focus. That means SnapServer and iSCSI product customers could be left in the lurch.
Adaptec has spent more than a decade trying to build upon its core RAID business and grow 'up the stack' into storage systems and software. It had a Direct Storage Group business selling I/O PC connectivity, which closed in its fiscal 2007. Its main business is called DPS (Data Protection Solutions), meaning RAID software applied to various storage interfaces such as parallel SCSI, Serial ATA (SATA) and serial attached SCSI (SAS). This provides 80 percent or more of its revenues.
The Storage Solutions Group (SSG) is its second focus and sells SNAP Server network-attached storage (NAS) and iSCSI SAN products.
The company focuses on small and medium business (SMB) customers and CEO Sundi Sundaresh says Adaptec is differentiated from EMC, NetApp, HP and IBM here, by having no enterprise business to constrain product and channel features and because its approach is to build: "integrated appliance-centric solutions that drive complexity out."
The problem is that Adaptec's revenues have been declining for nine quarters and it has been making losses. Sundaresh came in to turn the company around and the FY 07 results demonstrated progress. For example, although annual revenues declined to $255.2 million from FY 06's $344.21 million there was an income of $24.8 million compared to a loss of $135.8 million in FY 06.
What has alerted and alarmed the Steel Partners hedge fund is that Adaptec is embarking on a new strategy to provide secure information management software to its SMB base, which requires technology to be acquired. Having a RAID software business which provides protection for disk controllers is no basis, fund leader Warren Lichtenstein says, for building a systems level secure information management business.
Sundaresh and his CFO, Chris O'Meara, point to the steady decline in Adaptec's core RAID systems business and add that it is affected by a revenue-sapping transition from mature parallel SCSI products to serial products where there is much more competition. Also the company's SSG unit, although growing strongly, contributes only about a sixth of Adaptec's revenues. It is not growing fast enough to compensate for the RAID-based revenue decline.
Looking at how to get the most value out of Adaptec's cash balances, Chris O'Meara, Adaptec's CFO, said last month: "we're looking at acquisitions that are focused around what we call SIMS (secure information management solutions) strategy. That's really where we're focused on using our net cash going forward."
"There are limited growth opportunities in the RAID part of the business," Adaptec needs to focus on the bigger growth area of systems products for small and medium enterprises which will need additional software content.
In its June 10K SEC filing Adaptec stated: "we will evaluate opportunities to acquire, enter into strategic alliances with or invest in companies with complementary or strategic products or technologies in order to scale our business."
It has been thought that Adaptec wanted to buy archiving and legal discovery company Zantaz but was out-bid by Autonomy.
Steel Partners stated it has asked Adaptec to discuss it getting "immediate representation" on the board, saying it is "disappointed and concerned with the company's performance and current direction" and with its "ill-conceived" acquisition strategy.
In other words Adaptec's SIMS strategy is wrong. If Adaptec doesn't comply, then Steel Partners will attempt to take over the board based on its thirteen percent plus share holding and director nominees. It could then direct Adaptec's CEO to bow to its wishes or replace him as it wished.
Steel Partners criticised the hiring of Sundaresh, saying he had no experience being a CEO of a public company. (He had been a CEO of a private company, JetStream.)
In struggles like this the interests of customers will be secondary to those of aggressive hedge fund investors looking for a profit.
Mary Camarata, Adaptec's worldwide director of communications, declined any further information. "Adaptec is currently in a quiet period and cannot comment," she said.
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