Seagate Case Study

Upon analysis of the Seagate Technologies case, the arbitrage opportunity exists in the fact that Seagate’s stock price is undervalued. An investor would purchase the Seagate stock, sell on the market at the fair value, and collect profit. As this arbitrage opportunity is recognized, other investors (or MBA students) would also purchase Seagate stock (regardless of the fact that they invest in Seagate with their own capital or borrowed from the bank, since these is an arbitrage opportunity, there will be profit realized) , the price of the stock would eventually rise to fair value, eliminating the arbitrage opportunity.

The reason Seagate stock was undervalued was due to lack of investor interest. Seagate was perceived as a riskier company by the investors. Market analyst did not show interest in disk drives because it was thought that disk drives would eventually become a commodity, whereas software development had an endlessly bright future. Veritas being the software firm benefited from having a high stock price based on the investor interest in software companies and the high growth market.

Seagate’s performance is ultimately reflected in Veritas’s stock price, giving little incentive to Seagate’s employees who own a significant share of Seagate’s stock to continue to perform. Seagate was unable to expand because they could not attract investors. This would be an issue to Seagate’s management as employee moral would be low.

Veritas was the winner for getting 5% of Seagate stock for no cash as part of the stock swap deal. It will get 128 million of its shares in the deal in exchange for 109 million shares. Another benefit of the deal to the Seagate shareholders is a massive tax liability. The main loser of the LBO would be the federal government as there was no tax revenue recognized (the tax rate being 35% would result in significant revenues for the government). Silver Lake benefits from having the opportunity to benefit from this buy out by...