Seagate Buyout

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Seagate Technology Buyout
March 22, 2006

By:
Rachel Cluck
Beth Crocker
Heather Preston
Jessica Seal

Table of Contents
Introduction............................................................................3 Objectives ..............................................................................3 Overview................................................................................4 Alternatives – How to Address Seagate’s Low Stock Price ..5 Do Nothing.............................................................................6 Unload all VERITAS Stake ...................................................7 Sell to Other Investors ...........................................................7 Horizontal Merger or Buyout.................................................7 Vertical Integration ................................................................8 Leveraged Buyouts ............................................................. 10 The Discounted Cash Flow Model ..................................... 11 The Leveraged Buyout Model ............................................ 12 The SML Approach ............................................................ 13 LBO Price ........................................................................... 14 Capital Structure Proposed ................................................. 15 Payback Period for Silver Lake .......................................... 17 Shareholders’ Approval ...................................................... 17 VERITAS Shareholders’ .................................................... 19 Seagate Shareholders’......................................................... 19 Conclusion .......................................................................... 20 Exhibits ............................................................................... 21 Interview with Dave Kahre, CPA....................................... 27 Interview with Chris Meng................................................. 28 Analysis of Interviews ........................................................ 30 Works Cited ........................................................................ 31

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Introduction
Seagate Technology, Inc. was in need of a “major restructuring proposal” (Case 1). President and CEO of Seagate, Stephen Luczo, met with Silver Lake Partners L.P., a private equity firm, to discuss options for the proposal. After much debating, the best option seemed to fall into two stages, “a leveraged buyout of Seagate’s disk drive operations, followed by the taxfree acquisition of Seagate’s remaining assets by VERTIAS Software Corporation” (Case 1). In the following paper, we will show the calculations that helped us arrive at our conclusions of: •

Selling Seagate’s disk drive operations to Silver Lake through a LBO



Establishing a LBO price of $2.4 billion



Performing a tax-free stock swap with VERITAS



Arriving at a capital structure consisting of 40 percent debt and 60 percent equity

Since this was a “pioneering transaction in the emerging area of technology buyouts,” we did not have past cases to examine and compare previous decisions and so all our decisions are based off of our knowledge and extensive research of all the topics presented (Case 2). Objectives

Throughout the paper, we will comment on the presenting team’s paper content and figures. Also, we will show why the presenting team’s calculations and paper content lacked some very important issues brought up in the case, such as, shareholder concerns and the proper way to calculate the price for the leveraged buyout (LBO). Some of the main differences between their case and ours are:



How to calculate the price for the LBO
o They chose to use EBITDA
o After reading various articles on LBOs we feel net present value (NPV) is a better valuation tool
3



Focus on various financial ratios
o They calculated 22 different financial ratios that were not fully...
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