Rebuke of board rattles Quantum
Posted on Wed, Aug. 30, 2006
By Mike Langberg
Mercury News
Quantum, a mid-size San Jose company that makes tape drives for corporate data storage, is learning it's no longer safe to ignore shareholders.
In a stinging rebuke, some 20 percent of shares voted at Quantum's annual meeting Monday were cast -- in effect -- against the current board of directors by investors angry over continuing losses and a recent acquisition.
And there's some reason to believe Quantum's single largest shareholder, with almost 20 percent of the company's stock, would have joined the dissidents if not for legal restrictions.
The rebellion happened without any formal organizing effort, and is significant -- such votes at most annual meetings are usually no more than 1 or 2 percent.
``At the end of the day, this is a shot across the bow by unhappy shareholders,'' said Brian Freed, a stock analyst who follows Quantum for the firm Morgan Keegan in Memphis.
As with most corporations, shareholders could vote only for directors or ``withhold'' their vote. So ``withhold'' amounts to a vote of no confidence.
Quantum shareholders are unhappy for two reasons.
First, management keeps promising a turnaround that never seems to happen. For the fiscal year ended March 31, for example, Quantum reported a loss of $42 million on sales of $834 million. Sales in the quarter ended June 30 dropped 10 percent to $187 million, with a loss of $3.6 million, reflecting Quantum's dominant position in a maturing sector of the storage business.
Second, Quantum announced a big acquisition in May, buying Advanced Digital Information Corp. of Redmond, Wash., for $770 million.
The deal added a huge amount of debt to Quantum's balance sheet. It was also a surprise to investors, and was structured to avoid a vote of approval by Quantum shareholders.
``They've mortgaged the company without our consent or even preparation,'' said Benjamin Nahum, executive vice president of the New York investment firm David J. Greene & Co., which owns 4 percent of Quantum's stock. ``If this thing (the ADIC acquisition) went to the shareholders, it would have never happened.''
Quantum shareholders are saying ``enough is enough,'' added Rob Moses, managing partner of RGM Capital in Naples, Fla., which owns 1.4 percent of Quantum. Moses wouldn't say how his firm voted, but made it clear that he too is unhappy with the ADIC deal.
Rick Belluzzo, who took the top job at Quantum four years ago after a long career at Hewlett-Packard and brief stints as CEO of Silicon Graphics and president of Microsoft, has got to be feeling pressure right now.
Quantum's stock has gained a mere 1 cent a share on his watch -- closing Tuesday at $2.09 a share, compared with $2.08 on July 31, 2002, the day before his appointment was announced.
Quantum was up to nearly $4 in the spring, its highest level in two years, but investors voted with their feet on ADIC. The stock lost 13 percent of its value May 3, the day after the deal was announced, dropping to $3.01, and has been moving down steadily since.
Quantum's largest shareholder is Private Capital Management of Naples, a firm that's not reluctant to force changes at under-performing companies. I know this firsthand, because PCM started a process last year that culminated in the sale of Knight Ridder, the previous owner of the Mercury News.
PCM in recent years owned slightly more than 20 percent of Quantum shares, and agreed to vote with management at annual meetings to avoid triggering anti-takeover provisions. But PCM sold a small number of shares after the cut-off date for Monday's annual meeting, and now holds 19.4 percent -- leaving PCM free to vote against management next year.
Belluzzo, meanwhile, isn't talking. He ran a remarkably short annual meeting Monday, which I listened to by phone. It was 22 minutes, and he gave a 17-minute speech without once referring to shareholder concerns. A company spokesman said Tuesday that Belluzzo wasn't available for an interview, and refused to provide any information beyond the voting results.
Where does Quantum go from here?
Belluzzo could prove the market wrong by significantly boosting profits, along with the stock price, through the ADIC acquisition and a broader diversification aimed at data storage software and services. Or the board could decide to sell the company.
But business as usual is no longer an option. Monday's withhold vote shows Quantum shareholders could come back next year with an organized campaign to elect an alternate slate of directors, and quite possibly win.
There's a message here for every public company in Silicon Valley: Shareholders, even professional money managers who once were more inclined to sell than complain, are feeling more energetic these days and won't tolerate either poor performance or surprises.
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