Tech stock activism: Adaptec, Inc. and Many Others

To enhance their credibility in proxy fights, dissident investors increasingly put experienced corporate officials—including some former chief executives—on their board-seat slates, rather than simply propose relatively inexperienced managers from the activist firm. The tactic turns up the heat on the leaders of struggling businesses, and may increase dissidents’ board victories, sometimes resulting in the replacement of the CEO.

About 24% of 213 dissident nominees in 2009 contests had held top management roles at a public company, up from nearly 22% of 73 such candidates in 2004, reports data tracker FactSet SharkWatch.

“If I believe management is engaged in stupid, idiotic actions, I stand up and tell them so,” says Mr. Mutch. “In most cases, that means replacing the CEO.”

Mr. Mutch says the experience convinced him that many high-tech companies “are undervalued, undermanaged and poorly governed.”

Given the Company’s poor track record, we believe that the Adaptec Board should not be trusted to assess acquisitions, growth investments, and product expansions while overseeing a restructuring plan.

Specifically, our concerns include the following:

· Adaptec’s operational performance has deteriorated under management and the Adaptec Board;

· Adaptec’s poor acquisition strategy and recent about-faces in strategic direction have resulted in further erosion to stockholder value;

· Adaptec’s stock performance has lagged indices and peers; and

· Adaptec has rewarded executive officers with excessive compensation packages and retention bonuses despite the Company’s poor performance.

A contentious boardroom brawl occurred last August. Aristos Logic, which Adaptec acquired for $41 million in 2008, was generating less revenue growth than expected, Mr. Sundaresh informed analysts that month. Mr. Sundaresh proposed to fellow directors that they either sell the Aristos business or cut back investments severely to get costs under control, according to an attendee at the board meeting.

Mr. Mutch says he stood and attacked the CEO for switching strategy. “You sold us a bill of goods when you bought this company,” he recalls saying. “You’re not taking responsibility for this deal.” A shouting match erupted, with people “screaming at each other,” he adds.

Robert Loarie, another ally of Mr. Sundaresh, says Mr. Mutch unfairly accused the CEO of shirking his duties. Ex-director Joseph Kennedy says the dissidents also never grasped Adaptec’s strategy, and occasionally read newspapers during board discussions.

Mr. Mutch calls Mr. Kennedy’s and Mr. Loarie’s criticisms “incredulous.”

That same week, the split board replaced Mr. Howard as chairman. Steel won shareholders’ written approval to kick Messrs. Sundaresh and Loarie off the board last fall. The CEO soon resigned.