Baker Street Urges Xyratex to Consider Strategic Alternatives; Cites 'Flawed Strategy'

       By Saabira Chaudhuri 

    Baker Street Capital Management LLC has said Xyratex Ltd. (XRTX) should consider strategic alternatives, noting that the company's current market price is "dramatically lower" than its intrinsic value.

    In a letter dated Jan. 14, Baker--which owns roughly 23% of Xyratex's shares--said the company's "valuation discrepancy is largely due to the flawed strategy of reinvesting substantial profits from the company's mature core businesses in loss-making and unproven HPC and Cloud initiatives."

    Baker said Xyratex is plagued by "excessive and unnecessary research and development spending on speculative non-core initiatives that have failed to generate positive returns and have severely hurt the company's profitability."

    A representative of Xyratex didn't immediately respond to a request for comment.

    The letter also highlighted the need for "urgent board change" and stated that Baker Street has identified three highly-qualified independent candidates that it believes should be immediately added to the board.

    Baker said the board has "chosen the short-sighted approach of stalling, defending its flawed strategy, and offering excuses for why it is not able to have substantive discussions with us."

    The firm suggested in its letter that Xyratex must be "aggressively" right-sized and should focus on generating significant amounts of cash, which should be returned to shareholders by "aggressively repurchasing Xyratex shares as long as they trade at a discount to intrinsic value."

    U.K.-based Xyratex, which sells its data-storage systems to makers of computer equipment and disk drives, has recently posted inconsistent earnings and seven straight quarters of revenue declines. The company has focused on trimming costs to help improve its financial standing.

    Last week, Xyratex reported it had swung to a fiscal fourth-quarter loss as growth its smaller hard-disk-drive business couldn't make up for a large drop in revenue in its data-storage segment.

    Shares closed at $8.37 Friday and were inactive in recent premarket trading. The stock has fallen 45% in the past 12 months.

    Write to Saabira Chaudhuri at