UPDATE 1-Big shareholder urges Stec to consider strategic alternatives

Thu Dec 6, 2012 11:43am EST

By Chandni Doulatramani

Dec 6 (Reuters) - Solid-state drive maker Stec Inc should consider strategic alternatives including a sale, its biggest independent shareholder said in a letter to the company that expressed "serious concern" about its strategic direction.

Balch Hill Capital, which holds 9 percent of Stec, said the company's response to intensifying competition has been to broaden its product line and dramatically increase its operating expenses, particularly in research and development, to gain scale and compete.

"Yet, there is no commensurate increase in revenues or profits," the letter said. ()

Balch Hill also said Stec should consider selling itself to a larger industry player but did not name any potential buyers.

Seagate Technology, Western Digital Corp, Samsung Electronic Co, Micron Technology, Toshiba Corp and SanDisk Corp could be the potential buyers, Craig-Hallum Capital analyst Richard Shannon said.

"Potential buyers could span from companies who make hard drives to companies which makes flash memory," Shannon said.

"A flash maker would have an immediate advantage as they don't have to pay the margin on buying the flash, which is the biggest part of its cost," he said.

Stec, which makes solid-state drives that are faster and costlier than traditional magnetic drives, has been losing its share in the highly lucrative but cut-throat market for enterprise SSDs.

The company, whose shares were up about 1.5 percent at $4.90 in late-morning trade on the Nasdaq, has posted losses in the last four quarters.

Stec, which has lost nearly a third of its market capitalization in the last three months, was valued at about $225 million as of Wednesday.

The largest shareholders are the members of the family of co-founder Manouch Moshayedi.

Moshayedi, the chief executive for 22 years, resigned in September after U.S. regulators filed insider trading charges against him.

"We are extremely concerned that Stec has a deep-rooted 'founder-culture' with little regard for its public shareholders," Balch Hill said.

Stec's auditor PricewaterhouseCoopers LLP (PwC) resigned earlier this year.

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