Melissa Bockhold Heather Coddington - Franklin College

Seagate Technology Buyout
By: Melissa Bockhold
Heather Coddington
Laura Duerstock
Ali Wampler
March 22, 2006

TABLE OF CONTENTS
I. Introduction……………………………………………………………………3
II. Assumptions…………………………………………………………………...4
III. History………………………………………………………………………....4
IV. SWOT Analysis……………………………………………………………….6
V. The Disk Drive Industry………………………………………………………7
A. Market Share………………….…………………………………………...7
B. Competition………………………………………………………………..8
C. Marketing and Sales Structure………………………………………….....9
D. Products…………………………………………………………………..10
VI. Seagate Background………………………………………………………….11
VII. The Buyout…………………………………………………………………. 14
VIII. Problematic Issues and Recommendations…..………………………………19
A. Seagate’s Low Stock Price……………………………………………….19
B. Buyout Financing & Capital Structure......................................................20
C. Valuation of Seagate……………………………………………………..26
i. Company, Competition, & Industry Information……………...26
ii. Analysis of Historical Financial Statements…………………...36
iii. Projected Financial Statements………………………………...37
IX.
D. Needs and Concerns of VERITAS………………..……………………..41
Conclusion…………………………………………………………………...42
X. Silver Lake Partners Interview……..………………………………………...44
XI. Seagate Technology Interview……………………………………………….46
XII. Works Cited………………………………………………………………….48
2

I. INTRODUCTION
In 1999, Seagate Technology, Inc., decided that in order to increase their market
value, they needed to make some big changes. Due to their undervalued stock price,
Seagate decided to undergo a leveraged buyout (LBO) with Silver Lake Partners L.P.
During this time, four main concerns arose among the parties involved:
• How can Seagate address the company’s low stock price?
• How should the buyout be financed? What should the capital structure look like?
• How much should investors pay to acquire Seagate’s disk drive operations?
• How can Seagate address VERITAS Software Corporation’s needs and concerns?
After analyzing the case and talking to executives at Silver Lake and Seagate, we
think that Seagate’s low stock price is best addressed by a leveraged buyout with a new
capital structure composed of 45% equity and 55% debt. Furthermore, we have found
that the company is worth approximately $2 billion in the buyout. Finally, VERITAS
should agree to participate in the deal because they will also win by retiring a portion of
their stock.
conclusions.
The subsequent sections of this report will further explain how we arrived at these
3

II. ASSUMPTIONS
In analyzing the capital structure, the value of the company, and stock price of Seagate
Technology, we are operating under the following assumptions:
• Corporate tax rate of 34%
• Market risk premium of 9% (based on 75-year historic average)
• Capital expenditures from Projected Operating Performance of Seagate Disk
Drive Business are Seagate’s projected net working capital
• Seagate had no NCS before the leveraged buyout.
III. HISTORY
Brief History of Seagate Technology LLC and the Technology
Industry
1970s Buyouts are born.
1979 Seagate is founded by a group of five technology entrepreneurs and executives.
1980s Significant growth in use of buyouts occurs.
Mid-1980s
Slowdown in PC sales occurs. Computer manufacturers cut back significantly
on disk drive purchases.
Late 1980s
The use of buyouts reaches its peak. The average transaction carries a debt-tototal
capitalization ratio of 92%.
Leveraged Buyout (LBO) firms show a tendency to avoid the technology
1980s-Early 1990s industry due to rapid growth, short product life cycles, uncertain demand, and a
typical lack of tangible assets.
The luster of buyouts fades in the wake of the failure of several 1980s LBOs.
Early 1990s Slowdown in PC sales occurs. Computer manufacturers cut back significantly
on disk drive purchases.
1992-1993
Seagate is the ONLY independent disk drive manufacturer to remain
profitable.
Mid-1990s
LBOs resurface, but they are much smaller and are much more conservatively
structured.
1996-Early 1997
Seagate experiences a downturn, along with the rest of the industry, and
launches a broad restructuring effort.
Late 1990s
Disk drive industry benefits from increasing worldwide demand for electronic
data storage, but fierce price competition emerges.
4

1997
1997-1998
July 1998
May 1999
June 1999
Late 1999
October 1999
Early November
1999
1999
1999
January 2000
March 2000
2000
Total number of disk drive units sold continues to increase, but overall
revenues begin to decline due to a dramatic drop in prices. New areas to gain
revenue are explored to make up for the lag of revenue growth behind unit
growth.
Seagate closes or sells selected manufacturing operations in Ireland, Scotland,
Malaysia, Mexico, and the Philippines.
Approximately 80% of Seagate’s 111,000 employees are located in Asia.
Luczo becomes COO of Seagate.
Slowdown in PC sales occurs yet again. Computer manufacturers cut back
significantly on disk drive purchases.
Alan Shugart, Seagate’s co-founder and CEO, is ousted by the board and
replaced by Stephen Luczo.
Seagate sells its Network & Storage Management Group (NSMG) to
VERITAS Software for 155 million shares of VERITAS’s stock, thus
becoming its largest shareholder, with an ownership stake of more than 40%.
At the end of the fiscal year, 39% of Seagate’s sales come from desktop drives,
51% from enterprise systems, and tape drives and software contribute the
remaining 10%.
As a result of abandoning the mobile disk drive segment, discontinuing several
product lines, and making cuts of expenditures on new production facilities, the
company’s employee headcount decreases by over 20%.
Luczo is authorized by Seagate’s board of directors to seek advice from
Morgan Stanley to increase Seagate’s stock price.
Luczo meets with representatives of Silver Lake Partners L.P. to discuss a
major restructuring of Seagate. Morgan Stanley proposes a leveraged buyout
of its disk drive operations, followed by the tax-free acquisition of its
remaining assets by VERITAS Software Corporation.
Seagate is the leader in number of units shipped in Enterprise (41.0%) and
Desktop (21.1%) segments. Seagate leads the worldwide market with a 21.1%
share.
Again, Seagate is the ONLY independent disk drive manufacturer to remain
profitable.
Seagate enters the storage networking segment with the acquisition of privately
held XIOtech Cory, a provider of SAN technology.
Negotiations among Silver Lake, Seagate, VERITAS, and their advisors
continue.
Seagate is the leader in the worldwide disk drive industry, with total annual
revenues of nearly $7 billion and a market share of 21%.
(Andrade)
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IV. SWOT ANALYSIS OF SEAGATE
Strengths
• Hard disk drives are the most common media for storing electronic information.
• Largest market share in the worldwide disk drive market
• Leader in the worldwide industry by 2000
• Designs, manufactures, and markets a broad product line
• Multiple distribution channels
• Only independent disk drive manufacturer to be fully vertically integrated
• Products for both high-end and low-end markets
Weaknesses
• VERITAS stock owned by Seagate is worth more than Seagate’s entire market
capitalization
• Core disk drive operations are not receiving full value in stock market
• Overall revenue decline due to decreasing prices since 1997
• Higher research and development costs and capital expenditures than competition
Opportunities
due to vertical integration
• Increasing demand for larger and more efficient data access and storage devices
• Rapidly expanding demand for desktop disk drives due to consumer electronics
Threats
appliances requiring storage of large amounts of data
• Volatile financial performance in industry
6

B. Competition
Competition is the most important factor to consider in this industry. Due to the
relatively even market share distribution, each company has several viable competitors;
there are many manufacturers, but a limited number of customers exist. This amplifies
the competition in the disk drive manufacturing market. High supply relative to the
demand for disk drives creates fierce competition among suppliers (Andrade 3). This is
reflected in the product prices and revenues of disk drive manufacturers.
000s of units
300
250
200
150
100
50
0
Worldwide Hard Disk Drive Industry Historical Performance & Projections (1999-2003E)
1991 1992 1993 1994 1995 1996 1997
Years
1998 1999 2000E 2001E 2002E 2003E
Total Sales
8

millions of $
35000
30000
25000
20000
15000
10000
5000
0
Worldwide Hard Disk Drive Industry Historical Performance & Projections (1991-2003E)
1991 1992 1993 1994 1995 1996 1997
Years
1998 1999 2000E 2001E 2002E 2003E
Total Revenue
In the graphs above, we can see that total unit sales have steadily grown between
1991 and 1999 due to an increase in worldwide demand for disk drive storage. The
demand, however, is not growing fast enough to keep prices stable. Looking at the graph
of total revenues, it is clear that revenues have not followed the same steady, upward
trend. Prices have been driven down so far that, even with stable growth in unit sales,
revenues are unsteady and often decline from year to year. Pricing competition among
disk drive manufacturers has created this trend, and industry experts expect it to continue
(Andrade 3).
C. Marketing and Sales Structure
Competition among disk drive manufacturers is also prevalent in the industry
because suppliers sell to the limited number of customers. Each product cycle, lasting six
9

to twelve months, is a new opportunity for suppliers to gain sales relationships with new
customers and to continue selling to past customers. Typically, each customer uses only
a few disk drive suppliers at any given time. At the beginning of the new product cycle,
customers pre-select the suppliers they will use for the upcoming year. Customers
execute this process based on pre-announced performance and reliability requirements
and the availability of new products at the time of pre-selection. If a manufacturer does
not have new products to test or good performance to offer customers at this critical time,
they could potentially lose up to a year’s sales. Perhaps an even more serious
repercussion is the potential for damaging sales relationships with customers (Andrade
3).
D. Products
Disk drive manufacturers have explored new products and avenues to remedy the
lag in revenue growth, mentioned in the above section on competition in the disk drive
industry.
One area explored was storage networking. With the presence and prolific use of
the internet, email, and video and audio applications, options for larger and more efficient
data storage are increasingly necessary and in demand. Storage Area Networks (SAN)
and Network Attached Storage (NAS) are sophisticated options that manufacturers can
differentiate in the market and offer to the consumer (Andrade 3).
The other option is to enter the consumer electronics market. As consumer
products evolve, more and more data storage is necessary. Video data storage devices
(i.e. TiVo ® ), music storage devices (i.e. iPod ® ), video games consoles (i.e. Xbox ® ), and
personal computers are examples of products for this market. While the year 2000
10

projected sales of $0.5 billion for this market are small in comparison to the $26 billion
projection for the mainstream market, quick and steady growth is expected over the next
three years (Andrade 4).
Although these options are extremely attractive, possible problems lie within
competition, the most critical issue for the disk drive manufacturing industry. Bottom
lines will be affected, but this is difficult to measure. First, in the case of storage
networking, disk drive manufacturers would be competing against well-established
companies such as IBM and Dell. Predicting the success of smaller companies would
prove difficult. Second, because the consumer electronics industry is not immune to the
same competition that exists in the traditional disk drive business, there would be no way
to gauge the possibility of fierce competition and the dropping prices that would result
(Andrade 4).
VI. SEAGATE TECHNOLOGY
Unlike its competitors in this industry, Seagate practices vertical integration.
Seagate believes that vertical integration has several advantages. First, they have the
ability to control critical enabling technologies. By doing this, Seagate can eliminate the
risk of suppliers cutting down on research and development during slow economic times.
A second benefit to Seagate’s vertical integration is their control over the manufacturing
process, which allows them to increase production in a shorter amount of time if an
unexpected surge in demand occurs. Before Seagate took over manufacturing control,
increasing production took 12 weeks and levels could only be increased up to 80% of
target output. The final benefit of vertical integration is that Seagate can maintain lower
11

inventories of disk drive components since they do not have to worry about suppliers
meeting their demands (Andrade 4).
Although Seagate’s reasoning behind vertical integration is sound, their ideas are
not supported by many. Vertical integration tends to have substantially higher fixed
costs. While these high costs can be sustained, it can hurt a company in an economic
downturn. Most companies do not control manufacturing. Instead, they outsource the
production of computer hardware to specialized contract equipment manufacturers
(Andrade 5). The case states, and we agree, that by outsourcing the manufacturing
process to a few businesses, those entities could obtain economies of scale, resulting in a
lower cost for the hard disk drive industry. Since pricing is a major factor in competition
in the disk drive industry, being able to produce at a lower cost could give a company an
advantage over the competition.
Determining whether or not vertical integration is optimal is a difficult decision.
There are many factors to consider in the disk drive industry. We believe that each
company needs to look at what is most important to them. Do they wish to have the
absolute lowest costs, or do they prefer to have control over their product in order to
maintain high quality standards and appease their buyers? Control is Seagate’s primary
concern. While vertical integration may be frowned upon by many industry analysts,
Seagate was the only company that maintained profitability during the economic
downturns of 1992 and 1999 (Andrade 5). However, since pricing is such an important
factor in this industry saturated by competition, incurring high fixed costs could paralyze
Seagate if other companies are able to undersell them.
12

In 2000, Seagate was leading the worldwide disk drive market with a 21% share
of the total market. Taking all of this into consideration, we conclude that Seagate’s
vertical integration is not a bad strategy. Seagate’s success shows that controlling both
supply and research and development trumps the importance of pricing competitively in
the long run, since Seagate has proven to have the ability to ride economic downturns.
The disk drive industry is described as extremely volatile. During slowdowns,
companies can incur losses due to excess capacity and inventory. When a company has
excess inventory, their main objective is sell at a discount and cut their losses. Seagate
found a way to weather most of these downturns. The secret to their success lies in their
product mix. Seagate sells its disk drives not only to the high-end market, but to the low-
end market as well. Because of this mix, Seagate has earned a reputation of an efficient,
low-cost producer. Selling to the lower markets allows Seagate to achieve economies of
scale which has led to lower costs.
The only downturn Seagate has not able to fend off occurred in 1996 and early
1997. In response, the company decided to restructure. Seagate closed manufacturing
operations, left the mobile disk drive segment, stopped several product lines, and cut back
spending on new production facilities. The other major change from the 1996-97
downturn was the removal and replacement of Alan Shugart, Seagate’s co-founder and
CEO, with Stephen Luczo (Andrade 5).
Luczo decided to diversify away from traditional segments and to move into
faster-growing, higher-margin businesses. He also wanted to increase investment in
technology. In order to achieve these expansions, Seagate needed to make significant
capital investments (Andrade 6). Luczo decided the best way to accomplish these goals
13

was to turn the company private since disk drive producers had a hard time obtaining
capital for long-term projects. He turned to Silver Lake Partners L.P., a private equity
firm, for help (Andrade 1).
VII. THE BUYOUT
In May of 1999, Seagate sold one of its companies, the Network & Storage
Management Group (NSMG), to VERITAS in return for 155 million shares of VERITAS
stock. The transaction made Seagate VERITAS’s largest stockholder, creating an
ownership stake of over 40% (Andrade 6).
When a few problems regarding stock prices arose, concerned shareholders were
not far behind. Following the transaction, the market was failing to recognize the value
of Seagate’s stake in VERITAS, as evident from a 200% increase in VERITAS stock
versus only a 25% increase in Seagate’s stock. The board felt that the market was
incredibly under pricing Seagate’s stock. After two failed attempts to increase Seagate’s
stock price and unlock its value from VERITAS, the company turned to Morgan Stanley
for help. In early November of 1999, Morgan Stanley arranged a meeting between
Seagate executives and representatives of Silver Lake Partners (Andrade 6).
After several months of discussion, Silver Lake delivered a proposal and potential
solution to Seagate’s problem. This proposal involved a complicated two-step
transaction. The first step, illustrated below, would involve Seagate selling off its disk
drive business, including about $765 million in cash, to a newly-formed company
controlled by Silver Lake. The purchase would be financed through a LBO in which
Silver Lake and other private equity investors would provide a portion of the selling price
through equity, and the rest would be financed through debt (Andrade 7).
14

Buyout
Investors
The second step, illustrated on the following page, would involve merging the
remaining Seagate shell corporation with VERITAS through a tax-free stock swap. Each
share of Seagate stock outstanding would be exchanged for a combination of cash and
VERITAS shares. VERITAS would then acquire the Seagate shell corporation and its
128 million shares of VERITAS stock. In exchange, Seagate would receive 109 million
new VERITAS shares. No corporate or personal tax liability would be created by the
transaction as long as the merger qualified as “reorganization” under Section 368(a) of
the Internal Revenue Code (Andrade 7).
STEP ONE:
Seagate sells all operating assets to group of investors.
I. Cash
(Buyout purchase price)
• Operating Assets
• $765 Million Cash
SEAGATE
TECHNOLOGY
15

STEP TWO:
Seagate exchanges existing equity stake in VERITAS for new VERITAS shares.
The remaining Seagate assets are distributed to shareholders.
SEAGATE
SHAREHOLDERS
• 109 Million VERITAS Shares
• Cash Proceeds of Buyout
• Cash in Excess of $765 Million
SEAGATE
TECHNOLOGY
• 109 Million VERITAS Shares • 128 Million VERITAS Shares
VERITAS
SOFTWARE
16

A leveraged buyout is a concept that arose during the 1970s, and it became a very
popular finance tool in the high-yield bond market of the 1980s (Andrade 8). By
definition a LBO is the “acquisition of a company or division of a company with a
substantial portion of borrowed funds” (Note). While every LBO is unique with respect
to its specific capital structure, all LBOs use financial leverage to complete the
acquisition of a target company. The equity that LBO firms invest in an acquisition
comes from a fund of committed capital that has been raised from institutional investors
like private equity firms, insurance companies, college endowments, and individual
qualified investors.
Buyout funds are typically structured as limited partnerships. The firm’s
principles (management) act as the general partner, and the investors in the fund act as
limited partners. The general partner makes all investment decisions regarding the fund,
while the limited partners are responsible for making sure the funds are available when
they are needed or requested. These funds have a few standard provisions that include a
minimum commitment, an investment or commitment period, and term and
diversification. Also, the LBO firm will generate revenues in one of three ways: carried
interest, management fees, or co-investment (Note). Below are examples of typical
capital structures for LBO transactions from 1980-1999.
17

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
23%
16%
Capitalization Structure for LBO Transactions (1980-1999)
61% 63%
29%
8%
60%
40%
1 2 3 4 5
Equity Subordinated Debt Senior Debt
The first bar is a recreation of a typical capital structure of the early 1980s. The
second and third bars are recreations of typical structures of the late 1980s and the market
recession in the first two years of the 1990s. The last two bars are examples of common
capital structures resulting from leveraged buyouts in the rebirth (1992-1993) of the
market and the bull market (1994-1998) (Andrade 17).
There are many advantages to using leveraged debt in acquisitions. One of the
biggest advantages is the tax shield that arises from making interest payments. It is much
more appealing for companies to create a tax deduction opportunity than to create a tax
payment obligation like the ones that occur with dividend payments.
Another reason leveraged transactions can be advantageous is that often large
principle and interest payments will compel management to improve performance
50%
20%
30%
45%
35%
20%
18

operating efficiency. Therefore, the debt acts as a disciplinary tool that forces
management to focus on specific initiatives that might otherwise be postponed or rejected
(Note). A LBO is secured by the assets of the acquired business, just like a home
mortgage is secured by the value of the house being purchased. The bought-out business
(Seagate) continues to generate cash flows that are used to service debt incurred in its
buyout. In a successful LBO, equity holders (Silver Lake) tend to receive very high
returns because the shareholders are locked into a fixed return while the equity holders
receive all the benefits from any capital gains. “A LBO fund typically tries to realize a
return on a LBO within three to five years” (Note). At the end of this period, the equity
firm will exit. There are three typical exit strategies of a LBO. These strategies include
an outright sale of the company, a public offering, or a recapitalization (Note).
VIII. PROBLEMATIC ISSUES AND RECOMMENDATIONS
A. Seagate’s Low Stock Price
To address a low stock price, a company can do several things. First, they can
repurchase their own shares in the open market. This would decrease supply, increase
demand, and potentially result in a higher price per share. Second, a company can sell
the shares they hold in other companies. This will lower their amount of investments by
reducing holdings in other companies. Third, a company can liquidate its assets and
remove itself from the market entirely. Finally, a buyout or merger can be performed.
When the issues with Seagate’s low stock price arose in 1999, senior management
tried several options to remedy the problem. Initially, Seagate’s management sold
VERITAS shares they held and then bought back some of their own stock in the open
market. They felt that decreasing the amount of outstanding Seagate shares and untying
19

the value seen in its VERITAS holdings would result in a higher share price. Both of
these actions, however, failed in increasing the incredibly low stock price, so Seagate’s
management had to look for other options.
The company could have cut its losses by liquidating its assets and completely
getting out of the market. The problem with these options lies in the fact that huge tax
liabilities would be incurred for the company and its shareholders, and the entity would
be permanently terminated. The only other option for Seagate was a buyout or merger.
The plan they formulated and executed, a leveraged buyout, was an alternative to
liquidation. First, the creation of corporate or personal tax liabilities would be avoided.
Also, the company would be able to continue operations. As a result of the leveraged
buyout, Seagate will be a privately held company, and they will no longer trade stock in
today’s market. After the equity investors exit, Seagate will be able to re-enter the
market and issue their stock to be valued based on the company’s performance alone.
Management hopes that this action will result in the fair valuation of their stock once
public status is reinstated (Austin).
We agree with the Seagate senior management’s decision to go ahead with the
two-stage leveraged buyout. By avoiding heavy taxation, everyone wins. This was the
only option for Seagate to use if they were to ensure both the happiness of shareholders
and the future of the Seagate name and company.
B. Buyout Financing & Capital Structure
It is apparent from the above section that, over time, significant changes have
occurred in the capital structure of companies post-buyout. The downturn of the business
cycle, the near collapse of the junk bond market and diminished structural advantages
20

have all contributed to these changes since 1988 (Note). In the mid-1990s when LBOs
started to resurface, they were much smaller than those of the 1980s, and the capital
structures became much more conservative, as evident from the final three bars in the
chart on page 18 (Andrade 8).
Because LBOs must support extremely high amounts of debt, firms typically
target companies that operate in mature industries, generate stable and predicable cash
flows, and have a considerable amount of tangible assets that can be used as collateral
(Andrade 8). As of June 1999, Seagate has a fairly large amount of tangible assets,
$7,072 million, however, it is their unpredictable yearly cash flows that cause much
concern for investors to invest in their disk drive operations (Andrade 5). Firms also look
for a clean balance sheet with little debt, a strong, defensible market position, limited
working capital requirements, minimal future capital requirements, strong management, a
viable exit strategy and the potential for expense deduction (Note). Seagate seems to be
unappealing in the fact that they have a significant amount of debt compared to their
competition ($704 million versus $110 - $236 million). But they do possess a strong,
defensible market position as the leader in the worldwide disk drive industry.
The disk drive industry is not an easy place for LBOs for other reasons, as well.
Pricing competition, as we have stated, is intense among competitors, and product life
cycles are typically less than six months in length. Manufacturing costs and investments
are also high in this industry because companies must be able to meet the demands of
their customers very quickly for fear of losing key business relationships. Also, because
of the “technological sophistication” of the disk drives, a huge investment into a
company’s research and development (R&D) is required annually (Andrade 9).
21

For all the reasons listed above, Seagate appears to be operating in a very risky
market, yet the company also possesses a few attributes that give it the potential to do
well as a LBO. As we have discussed earlier, Seagate’s vertical integration gives the
company a strong competitive advantage while avoiding the costs of supply chain
problems. The high R&D and capital expenditure requirements also provide a barrier of
entry into the market (Andrade 9).
Because changes have occurred in how LBOs are structurally financed, returns
have become much more difficult to generate through leverage. Today, LBO firms are
looking to build value in acquired companies by improving profitability and pursuing
growth (Note). Silver Lake has great confidence in Seagate’s current management, and
they believe the company’s vertical integration cuts costs that improve the company’s
bottom line. Seagate, therefore, appears to be an investment that will be able to generate
significant returns for their investors. Also, many analysts expect that Seagate will re-
enter the mobile disk drive segment, which is likely to be an attractive area for future
company growth (Andrade 6).
While generating returns is important for private equity companies, a company’s
investment grade rating is very important to the LBO. If Seagate is able to maintain their
current rating of BBB, investors and analysts believe that the company will have greater
access to future financing. Since Seagate’s annual cash flows are somewhat
unpredictable, a buyout, like the one proposed by Silver Lake, will require the company
to have a higher level of equity and lower debt leverage in order for Seagate to retain
their current investment grade rating (Andrade 10). According to the table below, the
22

equity required in the LBO will have to be greater than 30.4% due to the above-average
risk level of the industry in which the company operates.
S&P Key Industrial Financial Ratios by Long-Term Debt Rating
Three-Year Medians—1997 to 1999
AAA AA A BBB BB B CCC
EBIT Interest Coverage 17.5x 10.8x 6.8x 3.9x 2.3x 1.0x 0.2x
Total Debt as % of Market Cap. 3.7% 9.2% 16.4% 30.4% 47.5% 59.3% 74.3%
The increase in the equity requirements for a leveraged buyout of a company such
as Seagate will change the proportions of the company’s capital structure after the
buyout. Less leveraging will have to be done in this particular case, than in past buyouts
because there is a much larger risk of debt failure.
Based on Seagate and Silver Lake’s objective to maintain their current investment
grade rating, BBB, we feel that their capital structure after the LBO should be composed
of 45% equity, 50% senior debt, and 5% subordinate debt. The equity portion of the
capital structure is composed of two parts. The first part is the equity, provided by the
private equity firm, Silver Lake, and its partners like Texas Pacific Group (Snow). We
feel these groups should provide approximately 89% of the total equity for the project, or
40% of the capital structure. The other 11% of the total equity should be provided by
Seagate’s top six managers including Luczo and Charles Pope, Seagate’s current CFO.
One of the stipulations of the deal specifies that these six managers must continue in their
current roles, and they must also “convert a portion of their Seagate equity into new
equity and deferred compensation of the company that would operate the disk drive
business” (Andrade 8). This stipulation exists for two reasons. First, Silver Lake has a
23

large amount of confidence in Seagate’s current management. Second, by having
management invest alongside the private equity company, Silver Lake is ensuring an
alignment between management and shareholder interests. Typically in situations such as
this, the private equity firm will own between 70-90% of the common equity of the
bought-out company (Note). Thus, Silver Lake’s 89% ownership of common equity is
right on target.
The senior debt will be financed by large financial institutions such as commercial
banks. Debt provided from these institutions is typically comprised of two components:
a revolving credit facility and term debt. Senior debt carries seniority or preference over
the other types of debt used in a LBO. These lenders have the most senior claim against
the cash flows and assets of a business, so principle and interest payments to this group
take precedence over other types of debt (Note). In Seagate’s particular case, we feel that
approximately 50% of the company’s new capital structure should be composed of senior
debt.
Subordinate debt, or junior debt as it is sometimes called, is the middle section of
the capital structure, and it generally fills the gap between the senior debt and equity in a
transaction. This type of debt “can take the form of notes from the private placement
market or high-yield bonds from the public markets, depending on the size and
attractiveness of the deal” (Note). Since this type of debt has claim on a company’s cash
flows and assets only after the senior debt has been dealt with, junior lenders’ low
priority and high risk is compensated with higher interest rates. In Seagate’s case, we
feel that this type of debt should account for 5% of their total capital structure.
24

after the LBO.
120%
100%
80%
60%
40%
20%
0%
The graph below shows our recommendation for Seagate’s new capital structure
Proposed Capitalization Structure
50%
5%
5%
40%
Suez Acquisition Company
Silver Lake Equity Seagate Mgmt Equity Subordinate Debt Senior Debt
We believe an equity allocation greater than 45% will deter Silver Lake and other
private equity firms from investing in Seagate because of the high levels of equity
investments required and the company’s unpredictable cash flows. An equity level below
45% is too risky if the company faces financial problems in the future because they may
have difficulty trying to pay off the large amounts of leveraged debt. Leveraging of any
kind can be a fantastic financial tool, but if Seagate’s cash flows are down in one or
multiple years, the leveraged debt would be detrimental to the company. Also because of
the changes in LBOs since the late 1980s, senior lenders have become increasingly wary
of highly-leveraged transactions. This is another reason that we feel the new entity’s
25

capital structure should have a higher-than-average amount of equity. We do not feel that
senior debt should exceed 91% of the total leveraged debt used, and because of the high
interests rates that can reduce a leveraged firm’s ability to weather downturns in the
business cycle, we feel that 5% is the maximum amount that the company should use in
subordinate debt.
C. Valuation of Seagate
There are three key considerations that must be included in any company valuation.
These include company, competitor, and industry information; analysis of historical
financial statements; and projected financial statements going out three to five years
(Company Worth). When determining the value of Seagate’s disk drive business, we
considered all the above.
i. Company, Competitor and Industry Information
Seagate holds a 21.1% market share in the worldwide disk drive industry as of
1999. They are dominating in almost all sectors, evident from a 41.0% share in the
enterprise market where the company experiences above-average gross margins of 20-
25%, and a 21.1% share in the desktop market where the company rakes in 10-15% gross
margins. The storage networking market and consumer electronics market are areas the
industry feels will grow in the near future.
Looking at the following sales growth and total revenue growth tables we can see
where the disk drive industry has been and where it is probably headed.
26

Worldwide Hard Disk Drive Industry Historical Performance & Projections (1991-2003E)
1992 1993 1994 1995 1996 1997
% Change in Total Sales 16 34.9 33.2 30.4 18.7 21
% Change in Total
Revenue
7.8 -17.1 5.7 0.1 20 -0.9
1998 1999 2000E 2001E 2002E 2003E
% Change in Total Sales 11.1 15.5 13.2 13.1 12.1 12.6
% Change in Total
Revenue
-6.8 -0.8 5.4 6.6 7.2 7.4
When looking at the sales growth of the worldwide hard disk drive industry, we
can see that the industry experienced very high growth between 1993 and 1997. As the
market matured, the growth decreased drastically from 21% in 1997 to 11.1% in 1998
and 15.5% in 1999. Industry analysts have predicted that the market will continue to
experience a modest amount of growth in 2000 through 2003 primarily because of the
almost certain increases in hard drive demand in storage networking and the consumer
electronics markets (Andrade 3-4).
The revenue growth in the worldwide hard disk drive market is much more
volatile and less predictable. While sales for the entire industry grew rapidly from 1993-
1997, the revenue growth ranges from a disappointing -17.1% to a very promising 20.0%.
Therefore, revenue growth does not seem to be a reliable indicator of market
performance.
It is vitally important to know where a company stands when it comes to liquidity.
In a situation like the one Seagate is in, it would be very helpful to know how much
liquidity Seagate has. In order to get a better understanding of their situation, we
calculated their financial ratios. The fundamental analysis was done using Seagate,
Quantum HDD, Western Digital and Maxtor’s 1999 financial ratios (Exhibit A). The
first ratio we looked at was the Current Ratio. This financial tool is used to determine
27

how capable a company is to pay back their short-term liabilities by using their short-
term assets. The higher this ratio is, the more able a company is to pay off these
obligations. This ratio also gives us an idea of how efficient a company is at turning their
products into cash. From our numbers in 1999, the Current Ratio for Seagate was 4.12
when compared to its competitors Quantum HDD, Western Digital, Maxtor. Quantum
HDD was the next highest with 3.11. It is easy to see that Seagate leads this category
and is able to turn their assets into liquidity faster than the competition.
The next ratio we looked at was the Quick Ratio. Like the Current Ratio, this
financial tool also tells us about a company’s short-term liquidity. However, this ratio is
more conservative than the Current Ratio because it only takes into account the
company’s most liquid assets. Like the Current Ratio, the higher the result, the more
capable the company is to cover all of their debts quickly. Our analysis shows that, once
again, Seagate is the highest with a Quick Ratio of 3.48, while Quantum is second with
only 2.67.
The Cash Ratio is another liquidity ratio that can be used to evaluate a company’s
short term ability to pay off their current liabilities. This ratio is even more conservative
than the other two because the only asset it takes into consideration is cash. As expected
from the previous ratios, Seagate is once again the highest with 2.27, while Quantum is at
1.53. The other two competitors are below one, which means that they would not be able
to cover all of their current liabilities with just their cash.
NWC to Total Assets is another liquidity ratio that shows us how much short term
liquidity a company has in relation to its total assets. In our case, Seagate has a ratio of
25%. The company with the highest percentage is Quantum at 48%, and the lowest is
28

Western Digital at only 7%. With this ratio, a low value indicates a low level of liquidity.
From this, we see that Seagate has a sufficient amount of short term liquidity compared to
its competition.
Interval Measure shows how long a company could survive if the cash flows
stopped. Our numbers show that Seagate would be able to remain in business for about
204 days, which is the highest of the four companies. Western Digital would exit the
quickest with a life span of only about 92 days.
The Total Debt Ratio shows how much debt a company has compared to its
assets. A company that has a Debt Ratio of more than one has more debt than assets. In
contrast, a company with a ratio less than one has more assets than debt. According to
our calculations, the only company that has more debt than assets is Western Digital.
The company with the lowest Debt Ratio is Quantum at 0.46 and Seagate at a close
second with 0.50.
Debt-Equity Ratio shows what portion of the company’s debt and equity is used
to finance its assets. A company with a high Debt-Equity Ratio usually has aggressively
used its debt to finance its growth. Seagate’s Debt-Equity Ratio is 0.1976. While this
shows that Seagate has used some debt to finance its assets, they have not used a
significant amount when compared to Maxtor’s Debt-Equity Ratio of 0.8876.
The Equity Multiplier displays a company’s total assets per dollar of
shareholders’ equity. In other words, it shows how much in assets an investor's dollar is
worth. This ratio is a commonly used tool of financial leverage. From our calculations,
we found that Maxtor has the highest Equity Multiplier at 5.11, while Seagate’s is at
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1.98. Although, Seagate is much lower than Maxtor, they are still above the other major
competitors.
The Times Interest Earned (TIE) Ratio is used to determine a company’s ability to
meet its debt obligations. A high TIE could indicate that a company is using too much of
their earnings to pay off debt. This would not allow the company to use those earnings to
invest in new projects and other means that would benefit the company and its
shareholders. Our analysis shows that Seagate has the highest TIE Ratio; this means that
compared to its competitors, they are using more earnings to pay off debt. Yet, this ratio,
like all ratios, is extremely relative since Seagate has much more debt than these four
competitors, and the company also has much higher sales revenue, total assets, and
market share than Quantum, Western Digital, and Maxtor.
Cash Coverage Ratio is a basic measure of a company’s ability to generate cash
from operations, and it is often used to measure the cash flow available to cover debt
obligations. Seagate, as well as Quantum, has a cash coverage ratio of 32.33. The lowest
company is Western Digital with 6.21. In theory, Seagate and Quantum can generate
enough cash flow from operations to cover their financial obligations about 32.33 times
each.
Inventory Turnover Ratio is measure of how many times a company’s inventory
is sold and replenished in a given time period. A high Inventory Turnover Ratio indicates
that a company has either strong sales or ineffective buying as compared to a low ratio
that shows weak sales or effective buying. The ratio does not reveal much unless it is
compared to the competition. Seagate has the lowest Inventory Turnover, 11.47,
compared to its competitors. Quantum has the highest at 22.35. So, from these numbers,
30

the ratio shows that Quantum turns their inventory over almost twice as often as Seagate.
This could imply that Seagate is either being very effective with their buying, or they are
showing weak sales.
Days’ Sales in Inventory shows how long it takes a company to turn raw materials
into sales. Seagate has the longest period with 31.36 days, and Quantum has the lowest
with just 16.33 days. This ratio could indicate that Seagate needs to reduce the amount of
time it takes to turn their raw materials into sales. More importantly, because Seagate is
vertically integrated, they should have a lower Inventory Turnover and Days’ Sales in
Inventory.
The Receivables Turnover is used to determine how effective a company is at
collecting debt and extending credit. A low ratio would essentially imply that the
company is inefficient in their collection of debt. A high ratio could show that a
company is efficient in debt collection or that they operate on a cash basis. Seagate has a
ratio of 7.8. The lowest is Maxtor at 7.57, and the highest is Western Digital at 10.14.
From these ratios, it appears that the industry is relatively consistent in their debt
collection abilities.
Days’ Sales in Receivables is a measure of how many days it takes a company to
collect on their credit sales. According to our numbers, it takes Seagate 46 days to collect
on their credit sales. Comparing this to the competitors, we can see that the company
with the quickest collection time is Western Digital with a collection period of 36 days.
The longest is Maxtor with 48.18 days. While Seagate’s 46-day collection period seems
long, it is still comparable to the competition.
31

The next ratio we calculated was Net Working Capital Turnover. This ratio tells
us how much work we are getting out of our net working capital. A higher ratio is
desired because it means the company is getting more out of every dollar of net working
capital. Seagate’s ratio is 3.84, the lowest of all competitors. The highest ratio is
Western Digital, which turned over net working capital 38.43 times in 1999. This
discrepancy between Western Digital and Seagate is another relative issue. Western
Digital has been performing relatively poorly in our fundamental analysis of Seagate and
their competitors, so why do they have such an appealing NWC turnover? The answer is
simple. Seagate has $1,773 million in NWC in 1999, Western Digital had only $72
million, and Seagate’s 1999 sales were 2.5 times greater than Western Digital’s.
Fixed Asset Turnover is a measure of sales a company generates for every one
dollar in fixed assets. Seagate turns over its fixed assets 4.03 times, so, they generate
$4.03 in sales for every dollar of fixed assets. Maxtor is the highest in this category,
generating about $22.31 for every dollar of fixed assets.
Total Asset Turnover is the same idea as the Fixed Asset Turnover; it takes into
account total assets not just fixed assets. Our ratios show that for every dollar of total
assets, Seagate generates $0.96. The highest company is once again Maxtor, with $2.79
in sales for every dollar of total assets. Because Seagate is vertically integrated, they
have higher levels of fixed assets then their competition. These higher levels will cause
their Fixed and Total Asset Turnovers to be lower.
The Profit Margin is the first of three ratios we examined to measure how
efficiently a company uses its assets and manages its operations. Specifically, the Profit
Margin tells us how much profit is generated for every dollar of sales. In most cases, a
32

higher Profit Margin is more desirable. Seagate’s Profit Margin, the highest in the group,
is 17%, meaning that they generate about $0.17 profit on every dollar of sales. Western
Digital is the lowest this time with a Profit Margin of -18%. So, in theory, they are losing
$0.18 on every dollar of sales.
The Return on Assets (ROA) is a measure of profit per dollar of the company’s
assets. In 1999, Seagate had a 16.63% return per dollar of assets, the highest among
competitors. The lowest ROA was Western Digital with -48%. A higher ROA is more
desirable because it means that the company is making more per dollar of assets.
A company’s Return on Equity (ROE) is similar to the ROA, except it is the profit
per dollar of the company’s equity. In 1999, Seagate’s ROE was 33%. The lowest was
Quantum with -19%. Since Western Digital’s net income and shareholder equity were
both negative in 1999, we did not calculate this ratio for them.
The Earnings per Share (EPS) Ratio is a measure of how much profit is accrued
by the shareholders for each share of stock. Seagate’s EPS was $5.17, the highest, while
Western Digital had the lowest at -$3.82.
The last ratio we looked at was the Price/Earnings (P/E) Ratio. This ratio tells us
how much a share is selling for compared to its earnings. Seagate’s P/E is 12.41, which
is to say that shares are selling at 12.41 times earnings. Maxtor is the highest with shares
going for 42.45 times earnings, and Quantum has the lowest with -4.79 times earnings.
When looking at how Seagate is fairing against their competition, we also looked
at market share and the historical operating performance and capitalization ratios for
Seagate and the U.S. disk drive industry from 1981 to 1999 (Andrade 12). The table
below shows the averages for each.
33

Seagate
Averages (1981-
1999)
Disk Drive Industry
Median Averages (1981-
1999)
EBITDA as % of Sales 13.03% 6.04%
EBIT as % of Sales 8.41% 2.21%
Debt/Book Assets 23.95% 12.63%
Debt/Market Assets 12.22% 6.53%
(Debt-Cash)/Book Assets -5.95% -6.74%
(Debt-Cash)/Market Assets -3.89% -3.42%
EBITDA Interest Coverage 22.49 4.49
EBIT Interest Coverage 16.33 1.39
EBITDA can be used to analyze and compare profitability between companies
and industries because it eliminates the effects of financing and accounting decisions.
EBITDA is a good metric to evaluate profitability but not cash flow. In the table above,
we have averaged Seagate’s EBITDA as a percentage of their annual sales from 1981 to
1999. When compared to the disk drive industry median averages, we can see that
Seagate is much more profitable than the industry as a whole.
EBIT is another indicator of a company’s profitability. EBIT is used much more
commonly than EBITDA because it nulls the effects of different capital structures and tax
rates used by different companies. By eliminating these two items, the figure focuses on
the company’s ability to profit. In our table, we can see that, over the past 20 years,
Seagate has had a much higher average EBIT as a percentage of their annual sales than
the disk drive industry as a whole.
Seagate’s Debt/Book Asset and Debt/Market Asset Ratios are much larger than
the industry on average. This could mean that Seagate has significantly more debt than
the average company in the disk drive industry. From 1997 to 1999, the company
averaged $704 million in debt. Three companies with significant market share in the disk
drive industry and major competitors to Seagate (Quantum HDD, Western Digital, and
34

Maxtor) all averaged $112 million, $354.33 million, and $350.67 million in debt,
respectively. These companies also have far less assets than Seagate, $7,072 million in
1999 versus $863 million to $1,470 million for the competitors.
While a large amount of debt is fairly undesirable in a LBO, we feel that because
of Seagate’s high revenues and strong market share, this is not a huge concern for the
company or potential investors when determining the value of Seagate. On the other
hand, because Seagate does have debt, this means that the company has an obligation to
make interest payments on this debt. The EBITDA Interest Coverage Ratio is the
number of times a company is able to cover their interest obligations with the money left
over from revenues after expenses (excluding tax, interest, and depreciation and
amortization) have been taken out. Seagate is able to cover their interest obligations for
one year 22.49 times, while the industry, on average, is only able to do so 4.49 times per
year. This calculation appears to be very volatile, however. In 1997, the ratio was at
43.66 times per year, and, in 1998, it dropped down to 8.84 times per year. In 1999, it
jumped back up to 10.25. This volatility is due to the nature of the disk drive industry.
As we have stated multiple times, cash flows and revenues are very unpredictable in this
industry because of fierce competition and short product life cycles.
By comparing Seagate to the disk drive industry medians, we can see that the
company has been, on average, outperforming the market for the last 20 years. Also,
from the analysis of Seagate’s and their top competitors’ key financial ratios, we can see
that Seagate again is outperforming their competition on almost every level. These facts
will carry a significant amount of weight in the valuation of the company.
35

ii. Analysis of Historical Financial Statements
We discussed some of Seagate’s major financial ratios in 1999 while comparing
the company to their competition, but it is also very important to look at the historical
statements and ratios to determine where the company has been. These ratios can be
found in Exhibit A.
Profitability ratios are some of the most important ratios to look at when
evaluating a company’s historical performance. These ratios include the Profit Margin,
Return on Assets (ROA), Return on Equity (ROE).
Seagate’s Profit Margins for the past three years (1997-1999) have been 7%, -8%,
and 17%. These margins re-emphasize that this industry experiences a lot of volatility
from year to year in cash flows. In 1998, Seagate’s sales alone dropped $2,121 million,
and net income dropped from $658 million to -$530 million. This explains why the
company’s Profit Margin dropped so drastically in a 12-month period (Andrade 13).
The ROA for Seagate varied from 10% in 1997 to -9% in 1998 to 17% in 1999.
Again, volatility seems to be a commonality. As stated in our discussion of Profit
Margin, the negative net income in 1998 forced ROA to drop dramatically. Fortunately
for Seagate, their $1,706 million increase in net income in 1999 sparked a jump in ROA
to a more respectable 17% (Andrade 13).
ROE was 19% in 1997, -18% in 1998, and 33% in 1999. Again, 1998 is
portrayed to be a very poor year for the company. Instead of making money, investors
lost $0.18 on every dollar of equity in the company. However, in 1999, again because of
positive net income, investors gained $0.33 on every dollar of equity.
36

These three ratios seem to reveal that when business is good, Seagate is great, but
when business bad, Seagate also suffers. Liquidity ratios are much more favorable for
the company. These ratios, as we stated earlier, show how quickly Seagate can turn
assets into cash to cover their debt obligations. Seagate’s liquidity values (or short-term
solvency measures) have been very strong for the company from 1997-1999. The
liquidation value of the company, which is the money left over when all assets are sold
and all debt is paid off, is approximately $6,368 million. 1 A company’s Book Value is its
assets less its liabilities. In 1999, the Book Value of Seagate was $5,654 million. 2
The long-term solvency ratios, like Total Debt and Debt-Equity, are important in
the valuation of Seagate because high debt relative to the company’s equity would make
the company less appealing to private equity firms like Silver Lake. According to
Charles Pope, Executive Vice President and Chief Financial Officer of Seagate, the
company wanted to ensure they had no net debt prior to the buyout. Net debt is defined
as interest-bearing debt less cash (and equivalents). Seagate’s interest-bearing debt in
1999 was $704 million, and their cash and cash equivalents were equal to $1,623 million.
Therefore, the company had no net debt prior to the buyout. This makes the company
much more appealing to investors because Seagate has the ability to quickly meet their
short- and long-term debt obligations.
iii. Projected Financial Statements
While industry information and historical analysis of financial statements are
important when valuing a company, the most important factor to consider is the future.
How will Seagate perform after the buyout? What type of growth will the company
1
Liquidation Value: Total assets – short term debt – long term debt = $7,072 - $1 - $703 = $6,368
2
Book Value: Total assets – accts. payable – short term debt – long term debt = $7.072 - $1 - $703 - $714
= $5,654
37

experience? What will their earnings be? What value will the company bring to its new
investors? All of these questions and more must be answered before any group will make
an investment. According to Alan Austin, Silver Lake’s Managing Director and Chief
Operating Officer, “The fundamental metric of valuing a company is their cash flows”.
Using the projected operating performance for Seagate below, we figured their cash
flows after the buyout from 2000 to 2006 (Exhibit B).
Projected Operationg Performance of Seagate Disk Drive Business
Year Ending June 30,
2000 2001 2002 2003 2004 2005 2006
Base Case ($ millions)
Revenues $6,619 $7,417 $8,564 $9,504 $10,416 $11,359 $12,350
COGS 5,355 6,008 6,868 7,461 8,104 8,735 9,324
Gross Margin 1,264 1,409 1,696 2,043 2,312 2,624 3,026
EBITDA 141 189 316 449 499 614 724
Depreciation 625 626 642 666 708 726 729
Capital Expenditures 627 690 720 795 700 725 750
Upside Case ($ millions)
Revenues $6,619 $8,185 $10,146 $11,283 $12,626 $13,961 $15,404
EBITDA 141 365 689 783 867 1,000 1,167
Downside Case
($ millions)
Revenues $6,619 $7,393 $7,797 $8,310 $8,801 $9,269 $9,759
EBITDA 141 189 322 363 378 403 407
When calculating Seagate’s cash flows for the base, best, and worse case
scenarios, interest was not included because it is not relevant to forecasting. Seagate will
be borrowing more than in the past, and this borrowed amount has not yet been
determined, thus it will play no role in the determination of Seagate’s value (Austin).
Examining EBITDA is a starting point in the valuation process when looking into the
company’s future. EBITDA is preferred over EBITA or EBIT because depreciation is
not factored into this figure. We do not want to consider depreciation in our valuation of
Seagate because depreciation is a past expense, and what was spent in Seagate’s past is
38

irrelevant to their value to Silver Lake. Seagate’s projected EBITDA in the base case is
averaged to be $1,093 million, the best case average is approximately $1,391 million, and
the worst case average is about $989 million. While EBITDA gives us a good idea of
what the value of the Seagate might be, we feel that these figures are too low.
EBITDA can be used as a starting point, but total cash flows are most important
to potential investors because cash flows can provide insight into the investors’ future
returns. The cash flows for the base case, best case, and worst case of our sensitivity
analysis can be seen in Exhibit B. We averaged these cash flows from 2000 to 2006.
The base case average is approximately $1,097 million, the best case is approximately
$1,293 million, and the worst case is $1,028 million. We feel that these numbers better
quantify the value of Seagate.
As we know, Silver Lake will also receive $765 million in cash with their
purchase of Seagate’s disk drive business. With this cash figure added to the above cash
flow averages, the base case becomes $1,862 million, the best case becomes $2,058
million, and the worst case becomes $1,793 million. Because of Seagate’s large market
share in the worldwide disk drive industry, their strong results from the fundamental
analysis, their lack of net debt, their strong current management, and the potential growth
in the market through storage networking and consumer electronics, we believe Seagate
is worth approximately $2 billion.
This figure should be approved by both parties for many reasons. First of all,
Seagate should like this price because it is almost exactly what their cash flows plus the
$765 million in cash are estimated to be in the best case of our sensitivity analysis. Silver
39

Lake and other potential investors should jump on this price because it is less than one
third of what Seagate’s projected sales will be in 2000.
Using the capital structure suggested in section VIII-A, the purchase price of $2
billion dollars would be divided among participants as follows:
Participant $$$ Provided
Silver Lake & Partners (40%) $800,000,000
Seagate Management (5%) $100,000,000
Senior Debt (50%) $1,000,0000,000
Subordinate Debt (5%) $100,000,000
With Silver Lake and their partners providing $800 million in equity for the
buyout, we have calculated the net present value of their investment under time frames of
three, four, and five years. We chose these project term lengths because a typical LBO
lasts three to five years. The discount rate used for the investment was found using the
Capital Asset Pricing Model (CAPM). We used the three-month T-Bill rate as our risk-
free rate of return. This rate as of March 2000 was 5.88%. We assumed the market risk
premium to be approximately 9% based on an average of the past 75 years (Corrado 191).
The company’s beta is 1.2 (Andrade 13). Using these figures, we found the discount rate
for the company to be 16.68%.
R
R
R
E
E
E
= 0.
0588 +
= 0.
0588 +
= 0.
1668
1.
2*
0.
09
0.
108
40

Exhibit C shows the cash flows for Silver Lake and their partners over the length
of their investment. The NPV calculations, as well as the IRR and Modified IRR, are all
displayed below.
NPV IRR Modified IRR
3 years (2000-2002) $1,819,306,394 177.34% 73.26%
4 years (2000-2003) $2,657,283,378 189.37% 68.23%
5 years (2000-2004) $2,756,587,640 182.91% 57.25%
From these figures, we can see that at an investment level of $800 million, Silver
Lake and their partners are investing in a project with a very significant NPV. The
modified IRRs show that as long as Silver Lake’s required return is less than 57.25%, the
investment in Seagate should be accepted. The IRRs are modified to ensure the rate is
conservative and eliminates the possibility for multiple IRRs in the calculation of NPV.
It is very doubtful that Silver Lake would require a return anywhere close to 57%, so it
seems feasible to state that the projected valuation of $2 billion, along with the
recommended capital structure, fits the needs of Seagate with the profitability objectives
of Silver Lake.
D. Needs and Concerns of VERITAS
The final question that needs to be addressed before the LBO can take place is
making sure that VERITAS is in agreement and satisfied. After Seagate sells its disk-
drive business to the Suez Acquisition Company, which Silver Lake created for the
buyout, the only significant assets left are cash and VERITAS shares. VERITAS was the
most likely merger, but it had no desire to acquire a disk drive business. VERITAS’s
41

CFO Kenneth Lonchar stated, “We were interested in staying away from it [Seagate].
We are building a nice software business, and we don’t want to be distracted” (Mintz).
However, to complete this deal, Stephen Luczo had to have VERITAS’s participation.
Luczo asked VERITAS to acquire the remainder of Seagate’s company, which included
128 million shares of VERITAS stock. The next step in the merger would include
VERITAS distributing shares of its stock to Seagate shareholders in a tax-free exchange
(Mintz). “VERITAS would get 128.1 million of its shares by acquiring Seagate, but will
give Seagate holders only 109.3 million shares” (Sloan). Since stock-for-stock swaps are
not taxable, this allows Seagate to save around $5 billion in taxes. The stockholders also
gain because the swap allows them to defer the taxes on the stock they received from
VERITAS. So, a stock-for-stock swap is both beneficial to Seagate and its shareholders,
but would VERITAS agree to this deal? We believe that VERITAS would agree to
participate in the stock swap. “VERITAS retires $2 billion of stock without having to
pay anything for it” (Sloan).
IX. CONCLUSION
We have just addressed the issues of Seagate’s low stock price, financing and
capital structuring, as well as VERITAS’s needs and concerns. We have justified our
decision to value Seagate at $2 billion, thoroughly explained how the buyout should be
financed, and described how the new capital structure should look. We have given a
convincing argument as to why a leveraged buyout was the best choice in addressing the
low stock price. We have also addressed the concerns of VERITAS by offering them a
position where the company can come out ahead by retiring $2 billion in stock without
42

having to pay any taxes, while, at the same time, decreasing the amount of outside
ownership.
We feel that our recommendations regarding Seagate’s four main issues are the
best options for Seagate to implement in order to maintain its position in the market and
its future profitability.
43

X. SILVER LAKE PARTNERS INTERVIEW
Mr. Alan Austin, Managing Director and Chief Operating Officer
Silver Lake Partners
2725 Sand Hill Road, Suite 150
Menlo Park, CA 94025
Ph: 1-650-233-8149
The following questions and responses collected through a phone interview with Silver
Lake Partners Managing Director and Chief Operating Officer, Alan Austin at 4:00 PM
Wednesday March 15, 2006.
Question: How do you value a company when you are considering investing in
them?
Answer: The fundamental metric of valuing a company is their cash flow. You
must look at EBITDA and Capital Expenditures. You want to start with
Capital and take out the depreciation, interest expense, taxes and
amortization.
Taxes are not a factor because more than likely, they will be at a reduced
rate after the restructuring. Interest expense is not relevant because you
will be borrowing more than in the past. Depreciation is not factored in
because these are your expenses of the past. What you spent in the past
does not matter, from here on, it’s about future expenses. Finally,
amortization is not relevant because it is non-cash.
Other factors considered in valuing a company includes how fast they are
growing and whether they are in an attractive market.
Question: Why was Seagate given a $2 billion price tag?
Answer: We used the same analysis as I explained in the last question. We looked
at their EBITA and tried to see what the company could do to improve
them and move forward. For example, they can cut their operating
expenses.
Question: How do you determine the target capital structure of a company you plan
to invest in? Seagate?
Answer: In 1999, the amount of debt available to companies was 100%. However,
we had to look at what the company’s capacity to service the debt they
undertook. There has to be a comfortable margin in case of a bump in the
road. You also cannot leverage too much because then the company does
not have the resources to implement the changes or take on investments to
further their success.
In Seagate’s example, they had no net debt at the time of the leverage.
Net debt is defined as when your debt exceeds your short term assets.
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Question: How did Seagate differ from an average leveraged buyout at that time?
Why was Silver Lake able to invest in what many perceived to be an
unstable industry?
Answer: There used to be a Harvard Business Case Study that talked about the disk
drive industry. Their final answer was that the technological industry was
dying and no one should invest in it. Obviously, they don’t have that case
anymore.
Silver Lake Partners formed during a time when the technology industry
was in fact capable of investing in safely. However, many people thought
this industry was not suitable for buyouts or investing. This industry was
difficult to understand and their products life-cycles changed rapidly.
Silver Lake Partners formed around the idea that these companies were in
fact stable and they could be supported through investments.
Seagate was an opportunity for Silver Lake to unlock the puzzle and come
up with an effective financial engineering plan.
The disk drive business was regarded as a commodity business that did not
make much money and their prices weren’t stable, but went down every
year. People didn’t understand why anyone would want to invest in a
crummy market. However, Silver Lake understood that Seagate and other
businesses like it did not have to be viewed as crummy, but could in fact
be profitable.
Question: What are the best ways to fix a low stock problem when a company feels
that its stock price is being undervalued by the market?
Answer: Maintaining investor relations is important as well as getting out
information that your company is actually doing very well.
Another possibility is to use a company’s excess cash to buy back stocks
or make acquisitions to enhance the value of their company.
Many companies try these above mentioned ideas first, and then turn to
leveraged buyouts. Companies with low stock prices feel that they are not
appreciated by the market and therefore it makes sense for them to go
private. Then they can concentrate on restructuring the company in order
to be more attractive to the market or to strategic buyers. Then at some
date in the future, it is possible to have built your business back up to
where they feel they can go public again.
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Copy of thank you note mailed to Alan Austin on 3/17/2006:
Front: Inside:
XI. SEAGATE TECHNOLOGY INTERVIEW
Mr. Charles Pope, Executive Vice President and Chief Financial Officer
Seagate Technology
2725 Sand Hill Road, Suite 150
Menlo Park, CA 94025
Ph: 1-650-233-8149
The following questions and responses collected through a phone interview with Seagate
Executive Vice President and Chief Financial Officer Charles Pope at 6:00 PM
Wednesday March 15, 2006.
Question: How did you determine the value of your company?
Answer: The market was valuing our company at $15 million. VERITAS and other
companies were being valued at $22 billion. The market had too many
discounts in place on our company evaluations. Some of the discounts
included liquidity, market risk, and leakage.
Question: How did Seagate and Silver Lake decide on the $2 billion selling price?
Answer: We ended up settling for $2.05 billion dollars. It was a negotiated price.
We set up a new corporation to acquire our assets and then teamed up with
investors. The $2.05 billion was a purely negotiated value between
Seagate’s board of directors and the team of investors.
Question: How did you determine the capital structure?
Answer: We understood the cyclical nature and the risks of our industry.
Therefore, we knew that we needed lots of cash. Therefore, it is important
to have as little debt as possible in order to whether the down cycles.
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We ended up with almost a 1-1 ratio of equity to debt. We raised $975
million in debt and ended up with a little over $1 million in equity.
Question: When did Silver Lake exit and Seagate go public again?
Answer: We went public in 2002.
Question: Was it your intent to go public again after being private for a few years?
Answer: Our plan from the beginning was to remain private for only a short amount
of time and then go public. We just needed to rebuild our business so that
our market valuation would increase upon re-entry.
Copy of thank you note mailed to Charles Pope on 3/17/2006.
Front: Inside:
Copy of thank you note mailed to Ms. Gray on 3/17/2006.
Front: Inside:
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XII. WORKS CITED
Austin, Alan. Managing Director and Chief Operating Officer. Silver Lake Partners.
Phone Interview. 15, Mar. 2006.
Andrade, Gregor, Stuart Gilson, Todd Pulvino. “Seagate Technology Buyout.” Harvard
Business Case. 12, March 2002.
Elliott, Heidi. “An Act of Privacy.” Electronic News (North America). Vol. 46 Issue 14.
http://search.epnet.com/login.aspx?direct=true&db=buh&an=2993810.
Fiduccia, Bill. “What’s Your Company Worth.” Entrepreneur.com. December 2001. <
http://www.entrepreneur.com/article/0,4621,295301,00.html.
Jordan, Bradford D., Stephen A. Ross, and Randolph W. Westerfield. Fundamentals of
Corporate Finance. 6 th Ed. Boston: McGraw-Hill Irwin, 2003.
“Merger-Makers Stumble in Selling New-Age Deal Formats.” Mergers & Acquisitions:
The Dealmaker’s Journal. May 2000, Vol. 35 Issue 5.
http://search.epnet.com/login.aspx?direct=true&db=buh&an=3285295.
Mintz, S.L. “In VERITAS, a Good Price.” CFO. Jun 2000, Vol. 16 Issue 7.
http://search.epnet.com/login.aspx?direct=true&db=buh&an=3184422.
“Note on Leveraged Buyouts.” Tuck School of Business at Dartmouth. 30, Sept. 2003.
http://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LBO_Note.pdf.
Pope, Charles. Executive Vice President and Chief Financial Officer. Seagate
Technology. Phone Interview. 15, Mar. 2006.
Seagate Technology. www.seagate.com.
Silver Lake Partners. www.silverlake.com.
Sloan, Allan. “A Deal With Taxing Consequences.” Newsweek. June 2000, Vol. 135
Issue 23. http://search.epnet.com/login.aspx?direct=true&db=buh&an=3154156.
Snow, David. “Silver Lake Leads $2B Seagate Buyout.” Buyouts. April 2000, Vol. 13
Issue 8. http://search.epnet.com/login.aspx?direct=true&db=buh&an=3021844.
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