Case 9 & 10 Analysis
Seagate Technology Buyout
The Hertz Corporation
Advanced Corporate Finance MW 2:00-3:15 PM
On page 1, the “value-gap” is two-fold. It signifies an under-valuation of Seagate’s core disk drive operating assets due to unfavorable public market investor preferences. Furthermore, the value of the Veritas share price has caused the Veritas stake to far outweigh the value of Seagate’s stand-alone market capitalization. Since Seagate does not own at least 80% of the voting stock in Veritas, distributing the wealth intrinsic in that stake to Seagate shareholders would prove difficult due to the hefty corporate tax rate of 34% that would erode its full-value. From a sum of the parts perspective, it seems that since the Veritas shares held by Seagate appreciated by more than 200%, while Seagate’s shares only increased by 25%, the market assigned relatively no value to Seagate’s market leading position in the disk drive business. This lack of market recognition for the true value of Seagate’s assets forced management to seek action. The management believed that the value of Seagate should be attributed to the value of its operating assets. Since the market was attributing such a high value to its Veritas stake, the market made it appear that Seagate was an investment holding company, rather than being in the disk drives business. There also seemed to be a “value-gap” in the sense that the Veritas stake is attached to business risk in the software sector while the core operating assets of Seagate have business risk in the disk drives segment of the hardware manufacturing sector. Since the value of Seagate’s stock seemed to come completely from Veritas, it could no longer give proper employee incentives and stock option compensation plans to tie one’s interests to the firm’s operations. The performance of the firm would slowly have no affect on its share price as the Veritas stake took over as its direct impact. Seagate did not want to be valued solely by the performance of Veritas. It needed to find a way to unlock the value of the stake and a buyout seemed the most effective method. The notion that the market value of Seagate’s core disk drive businesses is negative lacks plausibility. The plausible assertions come from the value erosion due to taxes from attempting to unlock the value of the Veritas stake appreciation. Also the lack of traditional stock price targets for employee compensation plans due to the stock performance being more linked to the success of Veritas than the success of Seagate. Question 2
Essentially there are two purposes of the overall transaction. The management seek to restructure Seagate to its optimal setup where it is most fairly valued by the market and able to properly incentivize performance tied to stock-based compensation. Furthermore, the management would like to alleviate existing shareholder concerns about the vastly large appreciation in the Veritas stake by discovering a way to unlock the value of that stake without facing the additional corporate taxation. In part one of the two-part transaction, Seagate will sell all of its operating assets to a group of investors including Silver Lake amongst the largest of the buyout consortium. The buyout investors would acquire $765 million in cash as well as all the operating assets of Seagate. In exchange, the remaining Seagate shell would receive cash quoted at the buyout purchase price that would ultimately seek to fairly compensate Seagate’s existing shareholders for the core operations of the disk drives business. The focus of this stage of the transaction is to spin-off Seagate’s operations from the valuation uncertainty behind the original firm. At the same time, this transaction not only favors Seagate’s existing shareholders, but also it gives a private equity consortium the potential to realize an extremely high rate of return until realizing its exit strategy down the road. This is done for the...
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