ADAPTEC INC ADPT
February 03, 2010 - 2:47pm EST by
pokey351
2010 2011
Price: 3.07 EPS -$0.12 -$0.27
Shares Out. (in M): 120 P/E N/A N/A
Market Cap (in $M): 369 P/FCF N/A N/A
Net Debt (in $M): -380 EBIT 0 0
TEV ($): -10 TEV/EBIT N/A N/A

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Description

 

Dumpster Diving With Adaptec

 

Overview

Adaptec, Inc. was founded in 1981 and has a 29-year history of providing innovative data storage hardware and software solutions. The software and hardware products include ASICs, HBAs, RAID controllers, Adaptec RAID software, storage management software, storage virtualization software and other solutions that span SCSI, SAS, SATA and iSCSI interface technologies. Leading OEMs and system integrators build server and storage solutions based on Adaptec technologies in order to deliver products with superior price and performance, data protection and interoperability to their customers.

 Adaptec's range of RAID controllers, add-in cards and ASICs provide end users with a variety of price and performance options for connecting their storage.  These options range from low cost HBAs to high performance and high availability RAID controller cards, with features that improve energy efficiencies and reduce operating costs.

 

The Situation

Adaptec's revenue from serial legacy products started to decline significantly (-21% Y-o-Y), which caused them to bet their future/success on a strategy of multiple restructurings, new products, and obtaining new OEM design wins. A significant portion of this bet was made in the form of the September 2008 acquisition of Aristos Logic Corporation for ~ $40MM and sale of Snap Server NAS to Overland Storage (OVRL) for $3.3MM.

  • New products are now half of revenues mainly due to the continued legacy product decline.
  • Growth in new products fell victim to an ill economy is one opinion.
  • Aristos's revenue is anemic at best; always seems to be the "verge" of a Tier 1 OEM which one would hope for with a $40MM acquisition price and no revenue with an accompanying 60 person design team.
  • Adaptec bought equity in HIFN in the open market and ended up with a $2MM profit when EXAR acquired HIFN.

 

The Steel Situation

On December 17, 2009 Adaptec announced that CEO Sundi Sundaresh would step down effective January 4, 2009 and be replaced by an executive from Steel Partners LLC.  Sundi, who was removed from the BoD in October agreed to a "consulting deal" in which he will help to sell the company. Chairman Jack Howard (also of Steel Partners) was quoted as saying Sundi "has unique knowledge and expertise concerning the assets, business strategy and management of Adaptec.  Adaptec simultaneously announced they hired Blackstone Advisory Partners to assist in the potential sale or disposition of assets and operations.

 

Also, Douglas E. Van Houweling resigned from the BoD, which now has five members. This gives Steel Partners 3 of 5 seats on the BoD.

 

The aforementioned statements were the resolution of a very contentious "consent solicitation" process that ended with a Steel Partners victory.

 

Steel Partners owns 23,469,843 shares or 19.1% of Adaptec.

   

Valuation

The valuation to Adaptec is much more of an art than a science.

 

ADPT at $3.07 gives it a market cap of $370MM with $380MM in cash on its balance sheet, $150MM in NOLs (which do not expire until 2019 and ADPT has a $76MM valuation concealing its deferred tax assets related to the these NOLs) and the company owned Silicon Valley headquarters, book value stands at roughly $3.40 a share.

 

Q3 revenues of $16.9MM should serve as some semblance to trough revenue but for these purposes $15MM in quarterly revenue is the number.

 

Therefore at $3.40 book value and $0.50 in IP value = $3.90 price target

 

This seems like a nominal price to pay for access to over $300MM spent on R&D since fiscal 2005.

 

The logical buyers are LSI, PMCS and MRVL.

 

Catalyst

Sale of assets or company

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    Description

     

    Dumpster Diving With Adaptec

     

    Overview

    Adaptec, Inc. was founded in 1981 and has a 29-year history of providing innovative data storage hardware and software solutions. The software and hardware products include ASICs, HBAs, RAID controllers, Adaptec RAID software, storage management software, storage virtualization software and other solutions that span SCSI, SAS, SATA and iSCSI interface technologies. Leading OEMs and system integrators build server and storage solutions based on Adaptec technologies in order to deliver products with superior price and performance, data protection and interoperability to their customers.

     Adaptec's range of RAID controllers, add-in cards and ASICs provide end users with a variety of price and performance options for connecting their storage.  These options range from low cost HBAs to high performance and high availability RAID controller cards, with features that improve energy efficiencies and reduce operating costs.

     

    The Situation

    Adaptec's revenue from serial legacy products started to decline significantly (-21% Y-o-Y), which caused them to bet their future/success on a strategy of multiple restructurings, new products, and obtaining new OEM design wins. A significant portion of this bet was made in the form of the September 2008 acquisition of Aristos Logic Corporation for ~ $40MM and sale of Snap Server NAS to Overland Storage (OVRL) for $3.3MM.

     

    The Steel Situation

    On December 17, 2009 Adaptec announced that CEO Sundi Sundaresh would step down effective January 4, 2009 and be replaced by an executive from Steel Partners LLC.  Sundi, who was removed from the BoD in October agreed to a "consulting deal" in which he will help to sell the company. Chairman Jack Howard (also of Steel Partners) was quoted as saying Sundi "has unique knowledge and expertise concerning the assets, business strategy and management of Adaptec.  Adaptec simultaneously announced they hired Blackstone Advisory Partners to assist in the potential sale or disposition of assets and operations.

     

    Also, Douglas E. Van Houweling resigned from the BoD, which now has five members. This gives Steel Partners 3 of 5 seats on the BoD.

     

    The aforementioned statements were the resolution of a very contentious "consent solicitation" process that ended with a Steel Partners victory.

     

    Steel Partners owns 23,469,843 shares or 19.1% of Adaptec.

       

    Valuation

    The valuation to Adaptec is much more of an art than a science.

     

    ADPT at $3.07 gives it a market cap of $370MM with $380MM in cash on its balance sheet, $150MM in NOLs (which do not expire until 2019 and ADPT has a $76MM valuation concealing its deferred tax assets related to the these NOLs) and the company owned Silicon Valley headquarters, book value stands at roughly $3.40 a share.

     

    Q3 revenues of $16.9MM should serve as some semblance to trough revenue but for these purposes $15MM in quarterly revenue is the number.

     

    Therefore at $3.40 book value and $0.50 in IP value = $3.90 price target

     

    This seems like a nominal price to pay for access to over $300MM spent on R&D since fiscal 2005.

     

    The logical buyers are LSI, PMCS and MRVL.

     

    Catalyst

    Sale of assets or company

    Messages


    SubjectRE: Cash Burn/Fixed Costs
    Entry02/03/2010 04:04 PM
    Memberpokey351

    Last quarter which was Q3 the cash burn was $5MM due to the "consent solitication" and severance costs; Q1 generated a $6MM cash (a $2.6MM tax refund helped) and Q2 was slightly positive cash from operations. $25MM a Q in revenue should generate FCF, with continued cuts in SG&A, which are available.   I think the next step is an outright sale and believe with a nearly 20% stake Steel would desire the same outcome.  Historically, I have seen Steel buy penny stocks shells with NOLs not large IP rich (at one time) companies like ADPT. 


    SubjectRE: Value of IP
    Entry02/04/2010 02:38 PM
    Memberpokey351

    Using a rudimentary valuation method on the IP potion of ADPT, I am looking at it as: $300MM spent on R&D since fiscal 2005 and the Aristo acquisition of $40MM; do you discount those 25%, 50%, 75%....if I use 50% that still gets me to over $1 a share in IP which is not unreasonable, but may be wishful thinking.  ADPT is providing intelligence in the I/O (input/output) path, adding value between server and storage in the form of "intelligent power management", software and SSD caches--enabling customers using ADPT controllers to deploy less servers to attain equivalent or even superior performance and those lifecycles move in sync with server lifecycles.   Steel Partners had some well documented/publci issues, LP withdrawals, lawsuit by Carl Icahn etc., so I think the "Steel" premium no longer exists (apparently).


    SubjectRE: forced selling
    Entry02/04/2010 02:39 PM
    Memberpokey351

    At one point it is "rumored" that Steel had to make a distribution of securities to withdrawing LPs (Carl Icahn lawsuit) However....this is from Barron's 12/04/09 Steel Partners owns 23,340,900 shares (19.38%) of the data-storage outfit, after buying 2,527,605 between Nov. 25 and Dec. 4 at $3.15 each.


    SubjectRE: Core Business
    Entry02/05/2010 11:55 AM
    Memberpokey351

    I am using $15MM a Q revenue run rate as a "worst case" scenario and believe that the new products are getting a lukewarm reception (50% of revenue) given the decline in the legacy business. After $300MM on R&D and $40MM on the Aristos acquisiton I believe there is a meaningful product pipeline, although it needs to be placed upon a larger platform such as LSI, PMCS or MRVL.   Historically, Steel has been a buyer of undervalued and mismanged assets and not an operator and have to believe in that premise until proven wrong.

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