1. Describe the main terms of the Seagate Technology buyout? Why is Seagate undertaking this transaction? Is it necessary to divest the Veritas shares in a separate transaction? What are other alternative ways to create value?
The primary contemplated terms would be to sell Seagate’s disk drive mfg assets including $765M in cash to Suez Acquisition Company controlled by Silver Lake Partners. The purchase would be financed by equity put up by Silver Lake and also by an, as yet, undetermined amount of debt. In a second stage, the remaining assets of Seagate (essentially Veritas stock) would be merged with Veritas in a tax free stock swap.
Seagate is undertaking this transaction because it was it wants to decouple the share from Veritas and also to fully realize the value of the disk business from the Veritas shares. The proposed transaction was designed to allow Seagate shareholders to realize the full value for the company, by distributing Veritas tax free and by selling the disk drive operations at fair market value.
An alternative would be, in order to avoid taxes, Veritas would buy Seagate and spin off the Seagate disk business to Veritas shareholders.
2. What are the benefits of leveraged buyouts? Is the rigid disk drive industry conducive to a leveraged buyout?
A positive aspect of LBOs is that poorly managed firms can undergo valuable corporate reformation when they go private. By changing their corporate structure, replacing executive staff, unnecessary business units, and controlling costs, a company can revitalize itself and earn substantial returns. Since this type of acquisition involves a high debt-to-equity ratio, one corporation can easily acquire another company with little capital. If the acquired company’s returns are greater than the cost of the debt financing, then all stockholders can benefit, further increasing the value of a firm. Also, as a result of the high leverage and tax deductibility...
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