Seagate Technology Buyout
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Seagate Technology Buyout : Case Write-up
Submitted By : Simranjit Kainth (UCID: 10101326)
The case talks about the undervalued stock price of Seagate Technology (Seagate) and the subsequent decision of its management to undergo a leveraged buyout (LBO) with Silver Lake Partners L.P. (Silver Lake) to allow Seagate shareholders to realize full value for the company. In May 1999, Seagate sold its Network & Storage Management Group (NSMG) to VERITAS Software (VERITAS) in exchange of 155 million shares of VERITAS stock. As a result, Seagate became the largest stock holder in VERITAS with an ownership stake of over 40%. In subsequent months Seagates VERITAS stake substantially exceeded Seagates entire market capitalization. To answer the inquiries of concerned stakeholders, management began to consider ways to increase the stock price and unlock the value of its disk drive operation.
According to Exhibit 3 and 5, stock of Seagate and VERITAS are trading at $64.25 and $168.69 respectively. I would buy Seagate shares because if the deal takes place, for every Seagate share I would also be getting some VERITAS shares. Therefore, I would actually be trading in both equities (VERITAS and Seagate on the same underlying company-Seagate). Also, there is a strong possibility of Seagate going public again after closing of the deal. This will result in a jump in Seagates share price as market would unlock the value of Seagates disk drive operations and also realize tax savings on Seagates stake in VERITAS. But, this would simply be an attempt to arbitrage. If every MBA followed the same process, there would be more demand for Seagates share as compared with the actual supply. This would eventually result in an adjustment in the price of Seagates share to an equilibrium value where there would be no scope for arbitrage.
In financial theory, Net Present Value (NPV) of the assets held by VERITAS and Seagate as predicted by the market relates their stock prices. The capital asset pricing model employed by the market predicts the stock price of the two companies. In 1999, market was favoring the Internet businesses. Hence, Seagates core disk drive operations was not receiving full value in the stock market. Therefore, NPV of Seagates stock was much less and market was only able to recognize Seagates ownership stake in VERITAS. As a result, share price of Seagate was much lower as compared with VERITAS. Market inefficiency, as explained above, caused the major discrepancy in market value of the two stock. Another factor that affected Seagates stock price was its inability in converting the value of stake in VERITAS to value of shareholders. Seagate was not able to sell its stake in VERITAS due to prior agreement with VERITAS and distributing stock to shareholder would result in tax implications. All these factors