Melissa Bockhold Heather Coddington - Franklin College

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
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