Seagate Technology Buyout
Hard disk drives make up the largest sector of the information storage industry in 1999. The hard disk drive market can be classified into three separate categories, desktop, enterprise, and mobile. The mobile and desktop markets are expected to converge in the long run. While the desktop market represents approximately 58% of the $25 billion total hard disk drive market, enterprise margins were nearly double the margins in the desktop sector (10-15%). Since 1997, the number of disk drive units sold has grown while prices have dropped dramatically, causing overall revenues to decline. This situation is expected to continue, with revenue growth lagging far behind unit growth due to the vigorous competition between disk drive manufacturers. Growth Opportunities
One identified growth opportunity within the disk drive industry is storage networking, which provides disk drive manufacturers the ability to differentiate their products. The other identified growth opportunity is within the consumer electronics market. While only projected to have sales of $0.5 billion in 2000, the consumer electronics market is expected to grow over 50% annually over the next three years. About Seagate
Founded in 1979, Seagate Technology, Inc. is the market leading manufacturer of computer hard drives, owning 21.1% of the total disk drive market in 1999, an industry where six companies account for 95% of sales. Seagate also had the largest market share of the Enterprise (41%) and Desktop (21.1%) disk drive market sectors in 1999. In May 1999, Seagate sold its Network & Storage Management Group to VERITAS Software Corporation, an independent manufacturer of storage management systems, for approximately 155 million shares of VERITAS stock. With an ownership stake of over 40%, Seagate became VERITAS' largest stockholder. From June 1999 through November 1999, Seagate's stock price increased by 25%, while VERITAS' stock price increased by over 200%. This resulted in occurrences of Seagate's stake in VERITAS exceeding the entire market value of Seagate's equity, essentially assigning a negative value to Seagate's large and market-leading disk drive business. Market Valuation
In March 2000, Seagate's stake in VERITAS was valued at $21.6 billion, with an after-tax value of $14.3 billion. Based upon Seagate's financial data from June 1999 and projected future cash flows generated by their disk drive assets, the value of Seagate's non-VERITAS component of equity is approximately $1.8 billion. This is based on the Weighted Average Cost of Capital valuation method. In reality, Seagate's total market equity is worth approximately $14.6 billion as of March 3rd, 2000, which equates to a market valuation of $0.3 billion for the disk drive component of Seagate's equity. This is a potential undervaluation of $1.5 billion, based on the NPV-calculated value of Seagate's disk drive assets. The undervaluation of Seagate's component of equity was due primarily to two factors: tax liability of the VERITAS stake and the maturation of the disk drive industry. First, if Seagate tried to sell VERITAS shares, or distributed the shares to Seagate shareholders, a potential large tax liability would be created. Not only would Seagate itself be taxed 34% on the capital gains from selling the VERITAS shares, but shareholders would also be double taxed on their capital gains as well. Second, Seagate's core business of disk drives had fallen victim to the market frenzy surrounding the emergence and growth of internet businesses, and the gravitation of investors to favor this new industry over the more mature disk drive industry. This would limit Seagate's ability to obtain long-term projects from public markets for future business expansion. Proposed Solution
Due to the large tax liabilities, the potential arbitrage opportunity represented with this undervaluation market inefficiency of Seagate's disk drive operations of -$1.5 billion is...
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