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Seagate Case

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Seagate Technology Buyout

This case looked at Silver Lake’s proposed leveraged buyout (LBO) of Seagate Technology Inc’s (Seagate) disk drive operations, followed by the tax-free acquisition of Seagate’s remaining assets by Veritas Software Corp (Veritas).

The stock prices of the two firms varied greatly at the time with Veritas’ growing much more rapidly than Seagate’s, 200% versus 20% respectively. Executives believed that Seagate’s shares had become undervalued. In order to take advantage of the situation and make money with minimal or no risk I personally would have invested in Seagate. The idea being that the market would eventually realize this undervaluation and correct the price of Seagate’s shares or the company would look to unlock this shareholder value through other means such as the proposed LBO. If everyone in the market took this position, one would see greater demand for Seagate’s shares and therefore the price of these shares would increase eliminating the undervaluation and the arbitrage opportunity.

Seagate and Veritas shares were priced the way they were due to the market’s perceived risk of the two firms. Seagate was observed to have higher risk and that resulted in a more discounted share price. This risk involved the nature of Seagate’s business. In the late 1990’s disk drive producers were becoming more out of favour with the stock market versus software companies. Although disk drive producers were seeing growth in their number of unit sales, high price competition existed in the market, which drove down prices and revenues. As a software company, Veritas was observed to have lower risk.

Some soft issues caused by the relative pricing of these two shares included the difficulty for Seagate executives to offer proper incentives, such as high value stock options, to their employees. In addition, Seagate’s share price was closely tied

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