… And Adaptec Says the Opposite

Adaptec, Inc. commented on new reports by RiskMetrics Group and Proxy Governance, Inc., as well as an earlier report by Glass, Lewis & Co.

"We are puzzled at recommendations that stockholders consent to proposals that would give a hedge fund, Steel Partners II, highly disproportionate control of the Adaptec Board," said Douglas E. Van Houweling, Chairman of Adaptec’s Governance and Nominating Committee.

"The bottom line for stockholders concerned about the value of their investment should be this: they can choose between a Board majority and a CEO who have track records of exploring all options objectively – and of preserving capital and developing a strategic path toward significant value creation – or they can choose a desperate hedge fund with a dismal recent investment track record that offers no path toward value creation but proposes only steps that could leave Adaptec without competent technology management and subject to disposition at fire-sale prices," he added.

Another report by Glass, Lewis & Co. said Steel has "[no] substantive plan for improvement other than a sale of the Company’s operating business." Glass, Lewis & Co. said that, in its view, now is not the right time to sell the company – and it recommended that stockholders reject all of the proposals solicited by Steel.

The Board majority’s record is clear: the Board majority and management have long been – and continue to be – open to all value-creating options, including an acquisition or sale at the right price, or a return of cash to stockholders. The Board majority recognizes, however, a sale in today’s weak market, which Steel suggests, is likely to result in a fire-sale price just as Adaptec’s new products are attracting market acceptance.

In particular, the Board majority believes that RiskMetrics and Proxy Governance – while recognizing Adaptec’s positive steps to reduce its debt, improve its cash flow and invest in new products – missed the mark when judging the value that can be realized from management’s plan to turn the Company around, compared with Steel Partner’s plan to sell the assets in the near term.

Contrary to Steel’s insinuations, Adaptec CEO S. ‘Sundi’ Sundaresh has a track record in prior roles of advising boards to sell or dispose of assets when it is the best alternative. In addition, the Board has retained financial advisors multiple times since Mr. Sundaresh became CEO and has on several occasions explored strategic alternatives, including a sale – just not a fire sale. Finally, Adaptec has clearly stated that it is not in negotiations for any large acquisitions at this time.

The proxy advisory reports ignore the fact that the four Steel representatives on Adaptec’s Board have polarized discussions in the boardroom. For example, rather than engage in reasoned debate, Steel representatives repeatedly made threats that interfered with open discussions at Board meetings. This behavior, and their lack of engagement in the business, contributed to the Board majority’s decision to review the Board chairmanship – a position that had been filled by a Steel principal after Steel had threatened a proxy contest if it did not control the chairmanship. In fact, Proxy Governance attributed difficulties at the Board level in developing a unified strategic vision for the Company, although shared among the directors, as particularly the responsibility of the former Chairman, Jack Howard, a Steel designee. The Board this year concluded, during a regular meeting attended by all of the Steel representatives, to appoint a highly qualified and professional director to the position of Chairman. The Board majority has consistently been willing to give Steel representation and a voice on the Board and takes seriously its obligations to give a voice to stockholders. Proxy Governance states that there is a "need for significant change in the composition of this board" and the Company believes that the proposed slate for its annual meeting of stockholders presents that change with the addition of three new independent nominees.

RiskMetrics’ report does acknowledge that Steel’s Board representatives share in the responsibility for Adaptec’s performance in the last two years. Oddly, RiskMetrics decides not to hold them accountable, instead singling out two non-Steel directors and recommending a move that would reward Steel with greater Board representation.

The Proxy Governance report recognizes that Adaptec would likely be in much worse shape if it had not divested four of the five operating divisions Adaptec’s management team inherited when it began its turnaround process in 2005, or not aggressively addressed the weak margins in Adaptec’s remaining legacy products. RiskMetrics also noted improvements in Adaptec’s gross margins and cash position in recent years.

Adaptec urges stockholders NOT to give consent or sign a white consent card. Instead, mark the ‘Yes, Revoke My Consent’ boxes on the GOLD Consent Revocation card and mail it immediately. If you already have given your consent on a white card, you may revoke it by signing, dating and mailing the GOLD Consent Revocation card immediately.

Stockholders have a voice and will be heard in the election of Directors at the Company’s Annual Meeting of Stockholders. Adaptec’s stockholder-friendly Bylaws allow for majority voting. Steel’s consent solicitation concerns the removal of Directors and Bylaw amendments that would give Steel Partners effective control of the Board and would eliminate the opportunity for stockholders to voice their opinions on the Board’s nominees through voting at the Annual Meeting.