Posted by: Dave Raffo
Solid-state storage vendor sTec’s management team is in a fight to maintain control of the company ahead of next month’s board of directors election. The vendor and unhappy investment firm Balch Hill Partners today sent letters to shareholders making their cases for the candidates they have nominated for election.
Balch Hill is the largest independent shareholder of sTec, with approximately 10 percent of its common stock. The unhappy investors want to remove sTec’s CEO, former CEO and another director from the board. The Balch Hill letter called for shareholders to hold the sTec board accountable and charged it with destroying more than $1.3 billion of shareholder value. It also called for accountability for the company’s poor financial performance, pointing out that revenues dropped 56% in the last quarter from the previous year and 77% from two years ago. During the same time, sTec increased research and development spending 68% as it moves from an OEM sales model to selling direct and through VARs.
Balch Hill said, if elected, its nominees would immediately hire an interim CEO and launch a search for a permanent CEO to re-engage large OEM customers, return the business model to focus on OEMs, re-evaluate the company’s PCIe, SATA, I/O software and other business initiatives and explore a sale of sTec if it cannot stand on its own.
STec chairman Kevin Daly sent a letter on the vendor’s behalf, claiming sTec is making progress with its new business plan and its goal of generating more than $200 million of revenue in 2014 (its 2012 revenue was $168.3 million, down from $308 million in 2011.)
Balch Hill also said that sTec’s operating losses of more than $103 million for last year and $25 million more in the first quarter of 2013 raises concerns that the vendor will run out of money by mid-2014.
“We believe the Company has lost incredible market share in the wake of increasing competition because the Board first failed to anticipate such market share losses and then, in response to rising competition, decided to pursue a flawed strategy that is focused on going after its direct end users (its customer’s customers) rather than trying to repair its relationships with its large storage OEM customers …” the letter read.
The Balch Hill letter also called sTec’s spending “excessive and ineffective.”
Balch Hill has nominated Adam Leventhal, Clark Masters and Eric Singer to replace three of sTec’s eight directors at the July 12 election. The investment firm is seeking to remove CEO Mark Moshayedi, his brother and former CEO Maounch Moshayedi and Matthew Witte from the board. Manouch Moshayedi stepped down as CEO last year after the Securities and Exchange Commission (SEC) charged him with insider trading. The Balch Hill letter also claimed “Mark Moshayedi has a significant cloud over him regarding his questionable trading practices and the continued underperformance of the Company under his leadership.” Mark Moshayedi has not been charged by the SEC but was a subject of the original SEC investigation that brought charges against his brother. Mark Moshayedi was sTec’s president and COO during the time when the SEC charges his brother with insider trading.
Balch Hill wants Witte removed because he has failed to “launch a proper CEO search” as chairman of the nominating and corporate governance committee. Witte’s committee has also failed to independently investigate the SEC’s claims, Balch Hill charged.
In an interview with SearchSolidStateStorage last month, Mark Moshayedi said is brother’s case “has nothing to do with the company. The company and I have been cleared of any wrongdoing. Obviously, Manouch has his case, and it’s something he’s dealing with.“
Daly’s letter today defended sTec’s new business plan that took effect this year.
“We are beginning to see significant traction from our new go-to-market strategy and are successfully diversifying our customer base to include enterprise end customers, a segment we believe is key to our growth objectives and long-term success,” Daly wrote.
“We believe that the successful execution of this carefully crafted strategy, with specifically delineated milestones over the course of the next few years, will deliver long-term value to all sTec shareholders.”
Daly also proposed adding Alan Baratz to the board as it expands from seven to eight directors. Baratz has served in senior management positions at Cisco, Sun, and storage startup Neopath Networks. Daly said sTec has offered to add two of Balch Hill’s candidates to the board, calling that “more than reasonable representation given their combined approximate 9.8% ownership position …” but that Balch Hill declined the offer.