BOSTON - Adaptec Inc, a beaten-down technology company fending off hedge fund Steel Partners, accused the fund of wanting to break up the company and use its cash balances to acquire a bank.

For more than a month, Adaptec and Steel have exchanged attacks over who should lead the data storage company and whether the Milpitas, California, company ought to sell off its operations and other assets.

In the latest volley, Adaptec told shareholders in a letter on Tuesday that Steel's real goal is to create a corporate shell that can be used to acquire other assets, namely a bank.

Steel has not called for the board to give any cash back to stockholders. Instead, in recent discussions with management at Steel Partners' offices in New York, this hedge fund indicated that it sees Adaptec as a ready source of cash -- over $350 million -- that would allow it to pursue other investment opportunities, Adaptec director Douglas van Houweling said in the letter.

Steel, led by corporate raider Warren Lichtenstein, is asking Adaptec shareholders to oust the company's chief executive and shrink the board from nine members to seven, moves that would allow Steel-nominated directors to control the board. Steel argues the company, which trades for roughly the value of its cash holdings, would be worth more if it were broken up and sold off.

Adaptec, whose shares are little changed this year, has attacked Lichtenstein's motives and called attention to his hedge fund's recent setbacks.

Steel also controls WebBank, a Salt Lake City lender bogged down with bad and past-due loans.

The Tuesday letter also noted that a blank-check takeover vehicle controlled by Steel Partners on Monday terminated a July 30 agreement to acquire troubled Everett, Washington-based bank Frontier Financial Corp, after regulatory approvals could not be obtained quickly enough.

Investors who want to place big bets on the timing and extent of a recovery in bank stocks can invest in banks without turning Adaptec into one, the company said. Is a hedge fund -- essentially a collection of financial engineers -- really the best choice to navigate the ... risks currently buffeting the banking industry?

Steel Partners officials were not immediately available to comment.

In related news, Steel said that because the Frontier deal fell through, the acquisition vehicle, SP Acquisition Holdings (DSP.A), would expire on Oct 10. The blank check's assets will be liquidated and distributed to shareholders. (Reporting by Joseph A. Giannone; editing by John Wallace)

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