Seagate Technology Buyout

CASE ANALYSIS: Seagate Technology Buyout

AUTHOR: Tushar Patel

SID: 10068877

DATE: Jan 24, 2011

In 1999 Seagate sold its Network & Storage Management Group to VERITAS software in exchange for a 40% equity stake. Over the next 6 months VERITAS’ stock price increased 200% while Seagate’s only increased 25%. The stock market was not valuing Seagate’s disk drive business in its stock price. As to be expected Seagate shareholders wanted their shares to be valued appropriately. The market appears to be pricing in Seagate’s stock, the severe tax liability that Seagate would face if it sold its shares in VERITAS. This discount price in Seagate stock eliminates any arbitrage opportunities of owning VERITAS shares at a discount through Seagate shares.

Seagate also has some issues with its stock price as the core hard drive business is under scrutiny by analysts. Analysts are not in favor of Seagate’s business model of being a vertically integrated disk drive manufacturer. The stock is “out of favor” with analysts and that usually means the majority of potential stock investors will avoid the stock causing the relative stock price to be low. Another factor in the price disconnects between Seagate and VERITAS is that Seagate is in what is considered a “commodity” business that has high fixed costs. VERITAS on the other hand is in the high growth market of storage software and that would add a premium to the stock price.

Seagate is exploring a leveraged buyout transaction; the value for Seagate from this transaction comes from avoiding the tax liabilities associated with divesting the shares in VERITAS. With the LBO option, neither company nor investors will pay any taxes with this transaction. The only way the deal would succeed is if it benefited all parties (Seagate, VERITAS, shareholders and potential investors). This transaction is complicated but it is truly the only option for Seagate to fully value its shares.

Seagate shares are currently...