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Test & Measurement

Spirent Repels Boardroom Coup

Spirent Communications plc has rejected an initial attempt by major shareholder and self-styled "turnaround investment firm" Sherborne Investors to sack the vendor's chairman and install four of its representatives on the test equipment company's board.

Now, though, Spirent is being forced to call an Extraordinary General Meeting by Sherborne and two other significant shareholders, and Sherborne's proposals look set to be voted on by the test vendor's shareholders.

Sherborne, which has built up a 14.68 percent stake in the vendor in the past few months, proposed that three non-executive members of Spirent's board -- Chairman John Weston; the Chairman of the Audit Committee, former deputy CEO of LogicaCMG plc (London/Amsterdam: LOG) Andrew Given; and the Chairman of the Remuneration Committee, former Verizon Communications Inc. (NYSE: VZ) executive Frederick D'Alessio -- should be removed and replaced by four Sherborne nominees.

Sherborne has not proposed the replacement of the board's two executive members, CEO Anders Gustafsson and CFO Eric Hutchinson.

Spirent spurned Sherborne's proposal, noting in a regulatory filing that the scheme, which would see one of the investment firm's principals, Edward Bramson, installed as chairman, is not in the best interests of shareholders, as it would hand over control of Spirent to Sherborne "without shareholders being offered a premium for control or having an opportunity to vote on the proposed change. In addition, the proposal would breach a number of the key principles of the Combined Code on Corporate Governance," as Sherborne would have a majority of the board's non-executive members.

Spirent added that Sherborne had been offered two seats on the board, one as deputy chairman, and the chairmanship of the Audit Committee, but that the investment firm had spurned the offer "on the grounds it would not give them sufficient control over the Company."

Now Sherborne has enlisted the support of Credit Suisse and Artemis Investment Management Ltd. to create a group that holds about 25 percent of Spirent's stock, and has written to Spirent calling for an EGM.

A Sherborne spokesman says Spirent is now required to convene that meeting within seven weeks.

Spirent is in the midst of a restructuring process and is still encountering difficulties with its service assurance business, where, the company says in a brief trading update, the impact of a highly competitive sector is being exacerbated by "production issues at a component supplier." (See Spirent Stabilizes, Spirent Cuts More Jobs, and Spirent Slumps on Update.)

Light Reading Insider analyst James Crawshaw, who covers the test and measurement sector, believes Spirent's decision in October to further restructure the company and double the size of its share buyback scheme to £100 million (US$188 million) will be enough to retain the support of shareholders. (See Spirent Provides Update and Telcos Could Drop IPTV Ball.)

Crawshaw says it will be hard "to convince other shareholders that its 15 percent stake warrants four seats on the board," especially as that would amount to a takeover of the company without any financial compensation for the majority of investors.

He also questions whether there is much that Sherborne or the current Spirent management can do to further restructure the company without weakening its competitive position in the performance analysis (lab testing) market against rivals such as Agilent Technologies Inc. (NYSE: A) and Ixia (Nasdaq: XXIA), which, notes Crawshaw, are also finding the going tough at present.

The Performance Analysis division accounts for the majority of Spirent's revenues -- about 70 percent in 2005 -- and has a goal of 15 percent operating margins by the end of 2007, a target that is as aggressive as any in the industry, notes Crawshaw: "You couldn't say the management is setting the bar low."

One action that either the current board or one more influenced by Sherborne could take, reckons Crawshaw, is to sell the troubled and already heavily restructured Service Assurance unit, which, with its major Tier 1 carrier customers in North America, might at least attract a buyer for its user base.

But the analyst believes it's unlikely Spirent would sell its small but profitable Systems business, which is nothing to do with telecom testing -- it makes control systems for "electrically powered medical and small industrial vehicles" such as wheelchairs. That's because Spirent can offset the profits from that business against tax losses it has brought forward from previous years, a common financial strategy that enables companies to hang on to more of their profits, according to Crawshaw.

Shareholder sentiment might change, though, if the company has a poor fourth quarter. In October, Spirent said it was on course to report revenues for the year higher than 2005's £259.3 million ($489 million), as long as the final three months of the year weren't poor. Analysts are expecting 2006 annual revenues of £279 million ($526 million).

At present Spirent's share price has been only slightly dented by the situation. It currently stands at 56 pence, down only 2.5 pence since Sherborne's proposal was first unveiled late Wednesday.

— Ray Le Maistre, International News Editor, Light Reading

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