Seagate Technology Buyout - Case Study

Seagate Technology Buyout - Case Study

Question 1:

Why is Seagate undertaking this transaction? Is it necessary to divest the Veritas shares in a separate transaction? Who are the winners and losers resulting from the transaction?

Answer:

Seagate Technology was badly undervalued as far as stock market is considered, and due to this, the company decided to go for leverage buyout option. A large stake of VERITAS Software Corporation's stocks is owned by Seagate Technology, because of which its stock price is doubled (from its original price), however, the share price of Seagate Technology hardly changed for a long time. Therefore, the reason that the attempts and efforts of senior management were useless, made them decide to engage in Leverage Buyout (LBO). As a result, Seagate went for two fold transaction, i.e. the first is to sell out all of the company's disk drive manufacturing assets including $ 765 million of cash to the acquirer “Silver Lake”.

On the other hand, the most crucial thing for Seagate Technology is to take care of the large stake of VERITAS Software Corporation's stocks. Therefore, it was essential for Seagate Technology to go for a separate transaction in order to evade paying large amount of taxes. The transaction of shares among VERITAS and Seagate is taken into account as reorganization of asset, while not applying any corporate taxes. Thus, by using two-fold transaction, Seagate Technology became able to liquidate its undervalued shares as well as its stake in VERITAS. So, in my opinion Seagate Technology is definitely a winner in this scenario, as the business could successfully accomplish its objective. On the other hand, VERITAS as well as Silver Lake cannot be considered as losers because they can also take advantage of the assets resulted from the transaction (they bought from Seagate Technology) and generate more profit from it.

Question 2:

What are the benefits of leveraged buyouts? Is the rigid disk drive industry conductive to a leveraged buyout?

Answer:

The benefits of Leverage Buyout (LBO) are already discussed in above question, however, in addition to those benefits, Seagate Technology has a benefit over other disk drive firms and that makes this leverage buyout an attractive strategy. Since, the vertically integrated management can provide a firm an effective competitive edge, which would allow it to be less impacted by the slump of the economy/market and for avoiding expensive supply chain trouble.

Question 3: ...