Seagate Technology Buyout Case Solution

Seagate Technology Buyout

1. Which position in the VERITAS and Seagate Share would you take?

From the Exhibit 4, we see that from Nov’ 99 onwards, the Pre-Tax value of VERITAS stake held by Seagate Technology has increased significantly compared to the market capitalization of Seagate Technology. As a matter of fact in the same period VERITAS’ stock price increased by more than 200% to $168.69/share on Mar’ 00 ( as per Exhibit 5) when the stock price for Seagate Technology was $64.25 ( as per Exhibit 3). As a trader in Mar’ 00, it could be beneficial to short sell the VERITAS shares as they appear over-valued. The benefit of this would be that the shares could be returned to the broker when the value decreases.

2. Why is Seagate undertaking this transaction? Why are Seagate & VERITAS are priced the way they are and how does that relate to finance theory?

A main focus of concern for Seagate was the ability to consolidate and expand the firm to continue in their leadership position. With increasing competition in the disk drive market and shrinking revenues, it is imperative that Seagate look towards other avenues of growth. This would require significant R&D investment which was going to be difficult for Seagate with its low stock price. By moving towards a leveraged buyout, Seagate would be able to raise capital as a private firm and fund R&D. This stiff competition, declining revenues and historic volatility in the disk drive market indicate why Seagate is priced low. On the other hand, VERITAS is a much smaller firm in a completely different industry (software) and is experiencing significant growth, leading to a highly priced stock position. This continued growth could also lead to an opportunity for arbitrage in the market.

3. What other ‘soft-issues’ problems are caused by the relative pricing of Seagate & VERITAS?

The low stock price of Seagate relative to VERITAS was having a negative impact on the...