Seagate
“Seagate Buyout” | Case Study Analysis |
1. Why is Seagate undertaking this transaction? Is it necessary to divest the
VERITAS shares in a separate transaction? Do the shareholders of VERITAS gain or lose from this transaction?
Under the original organizational structure, Seagate’s management believed its current stock price is undervalued by the current market and thus not delivering the value to shareholders of Seagate stock. At this time, Seagate also held a significant stake in VERITAS stock, nearly 40%, acquired under a previous transaction. Not long after this initial transaction had occurred, the value of VERITAS stock increase nearly 200%, as Seagate’s stock rose only 25% during that same period. The value of the Seagate’s interest in VERITAS shares became so significant that the value of this single asset exceed the entire market value of Seagate’s operations. This raised a question in the minds of shareholders, questioning why Seagate’s stock was not returning a fair value in the market. If Seagate were to sell this stock and collect cash in return, they would be subject to significant tax liability, and thus would negatively affect Seagate’s stock price. Also, under the terms written in the previous transaction, Seagate was under strict limitations regarding selling the VERITAS stock. Realizing that their disk drive operations, despite being a market leader, were extremely undervalued, Seagate would have the chance to capitalize on the true market value of their operations for their shareholders by restructuring through a buyout.
The structure of the buyout of Seagate by Silver Lake is necessary. One of the major dilemmas in structuring the buyout is the large tax liability Seagate would incur when selling the VERITAS stock asset. Therefore, it is critical that two separate transactions are used to help create tax shield, protecting the value of Seagate’s and VERITAS stock, maximizing the return to the Seagate and VERITAS shareholders from
1. Why is Seagate undertaking this transaction? Is it necessary to divest the
VERITAS shares in a separate transaction? Do the shareholders of VERITAS gain or lose from this transaction?
Under the original organizational structure, Seagate’s management believed its current stock price is undervalued by the current market and thus not delivering the value to shareholders of Seagate stock. At this time, Seagate also held a significant stake in VERITAS stock, nearly 40%, acquired under a previous transaction. Not long after this initial transaction had occurred, the value of VERITAS stock increase nearly 200%, as Seagate’s stock rose only 25% during that same period. The value of the Seagate’s interest in VERITAS shares became so significant that the value of this single asset exceed the entire market value of Seagate’s operations. This raised a question in the minds of shareholders, questioning why Seagate’s stock was not returning a fair value in the market. If Seagate were to sell this stock and collect cash in return, they would be subject to significant tax liability, and thus would negatively affect Seagate’s stock price. Also, under the terms written in the previous transaction, Seagate was under strict limitations regarding selling the VERITAS stock. Realizing that their disk drive operations, despite being a market leader, were extremely undervalued, Seagate would have the chance to capitalize on the true market value of their operations for their shareholders by restructuring through a buyout.
The structure of the buyout of Seagate by Silver Lake is necessary. One of the major dilemmas in structuring the buyout is the large tax liability Seagate would incur when selling the VERITAS stock asset. Therefore, it is critical that two separate transactions are used to help create tax shield, protecting the value of Seagate’s and VERITAS stock, maximizing the return to the Seagate and VERITAS shareholders from