It is suspicious that the layer does not convert. Was there an error message that accompanied it when the conversion was attempted?
Also, I would check to be certain that both layers have assigned coordinate systems. It may be that one layer does not have an assigned coordinate system, but visually lines up in ArcMap as the coordinate system is already set for the Data Frame that is being used to view it (the data frame inherits the coordinate system from the first layer brought in).
Chris Donohue, GISP