Adaptec (ADPT) is a shell being run by Steel Partners.  Steel has 26.6% of the equity and controls the board with the intention to deploy the substantial pile of cash and tax assets towards purchasing a new business.  This has been a long, drawn out process for Steel who first got involved three and a half years ago.  But investors have the opportunity to invest with Steel at a significant discount and participate in what should be relatively straightforward endgame. 

Most of the Adaptec legacy business was sold to PMC-Sierra in May for $34m.  The sale finalized years of value destruction by previous management through continued reinvestment and serial acquisitions were never able to overcome the impending obsolescence of Adaptec's core RAID technology.  All that is left is the Aristos business (purchased for $41m in August 2008 and being wound down over the next quarter), ~200 patents, and the company headquarters in Silicon Valley.   There may be some residual value to the remaining patent portfolio - ADPT burned over $300m in R+D over five years and, according to an industry contact, had some interesting solid state caching technology.   But my understanding is that PMC-Sierra took the whole of the legacy business, a perpetual license for the remaining, non-core patents, and I ascribe them no value here.   As a side note, one analyst I spoke with thought that the value of the patents could be maximized by auctioning them off to lawyers to engage in extortive infringement litigation.  

The portfolio of tax assets includes the following:

I'm not a tax expert and have discounted the net tax assets by 50%.  But clearly, maximizing the value of the tax assets is part of Steel's investment thesis and they have the resources and experience to use the assets efficiently.   Tax assets are masked by a valuation allowance that is more historical legacy than an active attempt by Steel to obscure value.   My understanding is that cash has been repatriated to the U.S. from foreign subsidiaries, but that the associated tax liability is outstanding.

$5m in cash is being held in escrow following the PMC-Sierra transaction.  There is a minimal option and restricted stock overhang.  The securities portfolio is mostly (~75%) short dated (0-3 years) corporates and agencies.  Remaining rent obligations are $2m and remaining purchase obligations are $3m, but these will be negotiated down to match the runoff business.  Expected severance and benefits are $3.7m of which $2.3m was recorded in the fiscal first quarter (to July 2010).  Current assets (small receivables, prepaid expenses), property and equipment and other long term assets (investments in 2 VC funds) are on the books for ~$20m - roughly equivalent to total payables, other accrued liabilities, and other long term liabilities (mostly taxes).

There are several reasons to believe that the time horizon for a purchase is shorter rather than longer.  Steel is beholden to its investors, especially after trying to convert to a public partnership following steep losses and redemptions at the end of 2008.   ADPT took $10m of impairments in the last quarter, accelerating losses and creating tax assets.   The latest filing also announces the intention to put the building up for sale at the end of the year.   The tangle with the SEC and Steel's large equity holding mitigate the risk of value being shuffled out the door.   The fact that Steel is buying shares for its own account, rather than retiring them with ADPT's money, every time the share price dips below $3 is a positive.