SiliconBeat

Adaptec and its recent nemesis and largest shareholder, Steel Partners, declared a cease fire Friday afternoon when the Milpitas maker of computer storage products said it would nominate three of Steel’s representatives to its board of directors, while the New York private investment firm agreed to withdraw its opposing slate of five nominees.

But the impact of those three directors will be diluted a bit as Adaptec increased the size of its board by one, from eight to nine.

Back in May Steel Partners, which at the time owned approximately 13 percent of Adaptec’s shares, sent the company’s board of directors a letter requesting immediate “minority representation” and a seat on its transaction committee, set up in 2006 to help plan, evaluate and approve strategic business deals.

The letter blasted Adaptec’s “unfortunate trend of conducting ill-conceived acquisitions, which we believe has led to significant erosion of stockholder value during the past five years.” Write-offs from acquisition-related charges for “technology intangibles and goodwill” amounted to more than $175 million during the past five years, according to Steel, while Adaptec’s “net revenue has declined from approximately $402.5 million in 2005 to approximately $255.2 million in 2007. Gross margin has declined from 40% in 2005 to 32% in 2007.”

The letter also complained that Adaptec’s “research and development expenses are unreasonable in light of the Company’s operational failures and its inability to increase revenues,” and that the current board “has rewarded executive officers with excessive compensation packages and retention bonuses despite the Company’s poor performance.”

(Check out previous posts we’ve made regarding compensation at Adaptec and the special compensation being offered to its CEO for some secret missions.)

But the “ultimate report card for its management and its board of directors,” Steel wrote, has been the dismal performance of Adaptec’s stock, which lost 71 percent of its value in the five years ended March 31. That erosion, it must be said, has helped Steel acquire 18.1 million shares of Adaptec in 2007 for about $68.4 million, or roughly $3.75 per share. It’s stake now stands at 15.2 percent.

In June, Steel specifically asked that Adaptec: appoint three of its representatives to its board, one of whom would sit on its transaction committee; agree to hire “a profit-improvement consulting firm;” ask its stockholders to vote to opt-out of a section of Delaware corporate law that limits anyone acquiring ownership of 15% or more of a corporation’s outstanding shares from engaging “in a business combination with the corporation for three years thereafter.” A Steel representative assured the board that it had no “current intention” to propose an acquisition of Adaptec.

By early August Steel apparently had lost its patience with Adaptec’s lack of response when it requested Aug. 3 a complete list of Adaptec’s shareholders and how to could communicate with them regarding an opposition slate of nominees to Adaptec’s board, in addition to “other corporate records.”

A week later Adaptec’s chief executive, “Sundi” Sundaresh, said the company would be willing to nominate one Steel representative to its board, that it would consider adding that director to one of its committee’s but would not guarantee a seat on the transaction committee; but that it would not ask it shareholders to vote on the “opt-out” proposal. In return, it wanted the private equity firm to enter a “stand-still agreement” through the end of 2008, under which it would not acquire any additional Adaptec shares.

More back and forth ensued until Steel Partners launched its campaign August 24 to nominate five directors to Adaptec’s board, which would have given it control of Adaptec’s board, a drive it called off Friday.

As part of the deal, Steel will be represented on each of the board’s audit, compensation and nomination committees. But there was no mention of the transaction committee seat Steel had originally pressed for.

Adaptec shares closed Monday at $3.38, down four cents from Friday’s close, after the peace treaty was announced. They have lost 27 percent so far this year. The company is set to announce results for its latest quarter on Halloween, after the markets close. Trick or treat?