Adaptec Says Sayonara to Systems

Struggling Adaptec Inc. (Nasdaq: ADPT) is getting out of the systems business to concentrate on pushing its SATA and serial-attached SCSI (SAS) wares.

In an abrupt about-face of strategic direction, Adaptec hired Credit Suisse First Boston Corp. to help find a buyer for the systems unit that it built through the acquisitions of NAS vendor Snap and Eurologic. Adaptec acquired Snap in July 2004 for $100 million and paid $30 million for SAN vendor Eurologic in March 2003. (See Adaptec's $100M Snap Decision and Adaptec Adopts Eurologic.) According to Adaptec, the systems business accounted for $80 million in annual revenues.

Adaptecs systems business appeared to be riding high shortly after the Snap acquisition, when it announced an OEM deal to supply IBM Corp. (NYSE: IBM) with iSCSI and Fibre Channel low-end SAN systems last September. (See IBM Slips iSCSI Into SAN.)

Little more than a year later, Adaptec is struggling following four straight subpar quarters, the retirement of CEO Bob Stephens in May, and poor sales by IBM of its Adaptec systems. (See Adaptec Agonistes, Adaptec CEO Retires, and Storage OEMs Set to Shuffle Deck.)

Adaptec interim CEO Scott Mercer said in the company’s last earnings call in July that management was analyzing all of its businesses. In a statement released Tuesday night, Adaptec president Sundi Sundaresh said, "It was a hard decision for us, but we feel that selling our systems business is the best move for the company and its shareholders as we take the necessary steps in Adaptec's recovery. This will allow us to focus our internal resources on capturing a leadership position in the emerging Serial ATA and Serial Attached SCSI markets."That’s a different stance than the one Adaptec took in its quarterly earnings report filed in August. In that report, Adaptec said its “future revenue growth remains largely dependent on the success of our external and networked storage solutions” and “to a lesser extent our products addressing new technologies” such as SATA and SAS.

“We are shocked to see the company move to divest the systems business after communicating to investors for over a year that it would be the growth engine for the company,” analyst Wes Cummins of B. Riley wrote in a note to clients today.

The Snap deal never worked for Adaptec, as revenues from Snap products fell below expectations for the first three quarters after the acquisition. The systems unit had problems. It was late in delivering dual controller systems to IBM, and industry sources say IBM has already been considering getting its low-end systems from another source.

IBM did not respond to requests for comment by press time. An Adaptec spokeswoman today said the company is in its quiet period before its earnings report and could not comment further on its systems business.

As for possible buyers, there has been speculation throughout the industry that the major systems OEM suppliers would consolidate through acquisitions or mergers. That would make Adaptec rivals Dot Hill Systems Corp. (Nasdaq: HILL), Engenio Information Technologies Inc., and Xyratex Ltd. (Nasdaq: XRTX) candidates to buy, although Dot Hill CFO Preston Romm said it is unlikely his firm would bite.“I’m not so sure they have any assets we don’t have ourselves, as far as controllers or enclosures,” Romm said today at Dot Hill's analyst day.

Adaptec is hoping to capitalize on SAS technology, which is expected to show up in volume in storage systems in 2006. (See SAS Shows Its Face and SAS Starts to ROC.) Adaptec makes SAS RAID controllers and HBAs, as well as SATA controllers.

— Dave Raffo, Senior Editor, Byte and Switch