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Spirent Directors: Back Us or We Quit

Ray Le Maistre
11/29/2006

Two directors of test equipment firm Spirent Communications plc , including former Ericsson AB (Nasdaq: ERIC) CEO Kurt Hellstrom, have threatened to quit if shareholder Sherborne Investors gets its way at an upcoming Extraordinary General Meeting (EGM).

Activist investor Sherborne, which specializes in taking control of struggling companies and turning them around, built up a near 15 percent stake in Spirent during September and October, and requested four seats on the board, a move that would have given it effective control of the vendor. (See Spirent Repels Boardroom Coup.)

But Spirent's board rejected Sherborne's request, so the investor found some supporters for its plan, in Credit Suisse and Artemis Investment Management Ltd. , and requested the EGM, which is now scheduled for December 22.

Depending on how that EGM goes, Spirent could go into the Christmas holidays without four current board members.

In a statement issued today to the London Stock Exchange , Spirent noted that Sherborne and its supporters, who together hold about 30 percent of Spirent's stock, have proposed resolutions that call for the removal of three Spirent board members: chairman John Weston, audit committee chairman Andrew Given, and remuneration committee chairman Frederick D'Alessio.

Further resolutions call for four new board members to be installed, including Sherborne's Edward Bramson as the new chairman.

Spirent's current board recommends unanimously that investors "vote against all the Resolutions as it does not believe they are in the best interests of the Company and its shareholders as a whole."

But its also notes that "if all the Resolutions are passed, both Kurt Hellstrom and Marcus Beresford, the remaining independent Non-Executive Directors, have notified the Company of their intention to resign with immediate effect."

Resolutions require a simple majority of votes cast to be passed.

The statement says Hellstrom and Beresford "decided that, in such circumstances, the Board will no longer be able to function in accordance with established principles of corporate governance, and it would no longer be appropriate for them to continue as Directors." (See Spirent Stabilizes.)

The Spirent board says investors should vote against Sherborne's resolutions, which would give the investment firm effective control of the vendor, because: The current board deserves support; the current board has a clear strategy, while Sherborne has none; Sherborne isn't offering investors a premium for taking control; and the proposed new board members lack "relevant sector experience."

Light Reading Insider analyst James Crawshaw says investors will wait to hear Sherborne's case. "Perhaps they will present some superb strategy that will have investors falling over themselves to hand over control, even if that means that directors such as Hellstrom resign from the board," he says. "But I doubt it."

Even so, the next four weeks could be tricky, as much may depend on whether the company can convince the majority of investors that its restructuring process is working and that Spirent is on track for an improved 2007.

That restructuring, conducted during the past 18 months, has included the sale of a non-telecom asset, a share buyback scheme, some specialist acquisitions, and a number of cost-cutting measures mostly involving the loss of jobs. (See Spirent Gets Imperfect, Spirent Buys Test Partner, Spirent Cuts More Jobs, Spirent Slumps on Update, Spirent Buys Wireless Test Firm, and Testing's Tasty Tidbits.)

The company's financial performance in the current quarter could also sway investors one way or the other, though it's unknown just how much of a fourth-quarter update the board will be able to provide to investors at the EGM.

In October, Spirent said it was on course to report revenues for the year higher than 2005's £259.3 million (US$505.5 million), as long as the final three months of the year weren't poor. Analysts are expecting 2006 annual revenues of £279 million ($544 million).

Analysts are expecting the company to pick up and report better earnings in 2007. The Spirent board says that letting Sherborne take control would undermine the work that has been done towards that goal and would likely result in a reduction in the vital R&D investments required to keep pace with industry demands.

— Ray Le Maistre, International News Editor, Light Reading

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