REV. MARCH 12, 2002
Seagate Technology Buyout
In early November 1999, Stephen Luczo, president and chief executive officer of Seagate Technology, Inc. (“Seagate”), met with representatives of the private equity firm Silver Lake Partners L.P. to discuss a major restructuring proposal. Seagate was one of the world’s largest manufacturers of computer disk drives and related data storage devices, with approximately $6.5 billion in annual revenues. The restructuring contemplated a leveraged buyout of Seagate’s disk drive operations, followed by the tax-free acquisition of Seagate’s remaining assets by VERITAS Software Corporation, an independent manufacturer of storage management software. Besides the disk drive operations, Seagate’s main asset was a significant ($21 billion) stake in VERITAS’s common stock.
Management and Silver Lake believed the two-step transaction could generate significant wealth gains for Seagate shareholders. The need to take some action had become increasingly apparent since late summer, when, following a major run up in VERITAS’ stock price, the market value of Seagate’s VERITAS stake had come to substantially exceed Seagate’s entire market capitalization. Management attributed this “value gap” to two factors. First, the company would incur a significant tax liability if it attempted to monetize its VERITAS stake by selling the shares, and this liability was capitalized in Seagate’s stock price. Second, the company’s core disk drive operations were not receiving full value in the stock market, which currently favored Internet businesses and companies that manufactured cheaper data storage hardware. The proposed transaction was designed to allow Seagate shareholders to realize full value for the company, by distributing the VERITAS stock tax free, and by selling the disk drive operations at fair market value.
The transaction raised a number of thorny issues, however. First was the question of how much the investors should pay to acquire Seagate’s disk drive operations. Since Seagate was a public company, Luczo and the other company directors had a fiduciary duty to obtain a fair price for their shareholders in the sale. However, Silver Lake and its co-investors had to earn a rate of return on their investment that would adequately compensate them for the risks they would incur, and Luczo and other key senior Seagate executives would continue to manage the disk drive business.1
1 As the only member of management on Seagate’s board of directors, in order to avoid any conflicts of interest, Luczo was
excluded from all board deliberations, and from the final vote that approved the transactions described in the case. The entire process was coordinated and supervised by the Co-Chairmen of Seagate’s board, Gary Filler and Lawrence Perlman, neither of whom were members of management or investors in the buyout.
________________________________________________________________________________________________________________ Professors Gregor Andrade, Stuart Gilson, and Todd Pulvino prepared this case. The case draws on research by George Taylor (HBS Class of 2000) as reported in his paper, “The Emergence of Technology Buyouts” and on discussions with Cindy Shaw of Salomon Smith Barney. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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