Santa Ana-based disk drive maker STEC Inc. appears headed for a proxy fight with its largest shareholder as the company attempts to make a strategic shift to diversify its customer base.
Balch Hill Capital, which holds a 9.8% stake in STEC, claims the company’s management has “lost the trust of its key constituents,” according to a recent Securities and Exchange filing. The San Francisco-based private equity firm wants to replace all seven of STEC’s board members.
STEC is leaving room for further negotiations while signaling a willingness to fight.
“We continue to work with them to come up with an amicable agreement,” STEC interim Chief Executive Mark Moshayedi said. “If it comes down to a proxy fight, then it comes down to a proxy fight.”
New York-based Potomac Capital Advisors, which has a roughly 1% stake in the company, recently joined Balch Hill in contending that STEC’s “shareholder value is at risk without a reconstituted board.”
The dissidents have criticized STEC’s decision to respond to increased competition by entering new markets and boosting spending on research and development that has produced few gains. STEC ranks No. 40 on the list of the biggest public companies based in Orange County (list starts on page 10; related stories are throughout issue).
The push for a new board comes as former STEC Chief Executive and Chairman Manouchehr Moshayedi, Mark’s brother, faces insider trading accusations levied by the SEC. The dissidents’ complaints also point to divergent viewpoints on the long-term plan for the company as its faces fundamental shifts in its market.
Strategy
“We have a strategy that we’re trying to follow, the management team, the board of directors, that’s not somewhat aligned with what that particular investor thinks,” said Mark Moshayedi, who was elected interim chief by STEC’s board following his brother’s resignation. “We think they’re a little bit out of touch with regards to what’s going on in the market.”
STEC last week announced newly established sales programs targeting end users in a bid to win more business in the oil and gas, federal government, telecommunications, financial services, cloud and social media markets.
Investors gave a slight nod, pushing shares up nearly 1% on April 2 to a market value of $203.1 million.
The bid for sales to end users would supplement STEC’s focus on original equipment makers, which install the company’s solid state drives into data centers and computers.
The new strategy began to take shape 18 months ago, according to STEC executives. The company has added about 50 jobs ranging from salespeople to data center and public-sector specialists.
“We have industry guys that have been doing this for a very long time,” said STEC Chief Marketing Officer Ali Zadeh, a 25-year industry veteran who was hired in late 2011 to lead the push into new market segments. “They’ve done it for much bigger companies in the past. They’ve been very successful at those companies, and they have the contacts, as well.”
The company has relied on original equipment makers, such as Hopkinton, Mass.-based data center builder EMC Corp., for much of its revenue since it debuted a breakthrough solid state drive in 2009, giving it an early lead in an emerging market segment. Its market value reached $850 million within months, with sales rising to $354.2 million for the year—more than twice its revenue last year.
SSDs, which use chips instead of spinning disks to store data, are replacing hard disk drives for high-end corporate data storage because they’re more reliable and less costly to run, although initial purchase price is much higher.
STEC’s early lead in the SSD market has eroded as bigger competitors such as IBM and Hitachi and Dell entered the fold.
The company saw sales nose-dive 45% in 2012 to $168.3 million. It lost $103.2 million for the year, compared to an operating profit of $25.1 million in 2011.
“If you have three or four customers that account for 80% of your business, if one of them sneezes, you catch pneumonia,” Zadeh said.
STEC now finds itself going after corporate customers it originally targeted in 1990 when it first opened its doors. It shifted over the years toward a specialty supplying original equipment manufacturers.
The company’s bid to swing back to corporate sales comes amid an industry shift. Storage products have become commoditized in the past few years, leading to price drops and lower barriers to entry for new competitors. Meanwhile, advances in technology mean that many businesses no longer need entire storage systems supplied by OEMs, which typically cost millions of dollars. Now they’re buying custom components or one piece of equipment to fill storage needs for a fraction of the cost.
Framingham, Mass.-based market researcher International Data Corp. forecasts that corporate customers and other end users will buy nearly half of corporate storage capacity from OEMs by 2016, down from some 70% today.
STEC’s new strategy to move beyond OEM customers has failed to over at least some investors.
“They’ve lost the confidence of the Street a long time ago,” said Edward Parker, an analyst at New York-based Lazard Capital Markets. “The value is in their technology, and the management team has been unable to execute on that value.”
Analyst Aaron Rakers in a recent investor note voiced concerns about STEC’s cash reserves, which have dwindled by nearly $50 million in the past two quarters to $158.2 million.
“We believe investors will be gauging an ongoing cash burn story over the coming quarters,” wrote Rakers, an analyst at St. Louis-based Stifel Financial Corp.
