Melissa Bockhold Heather Coddington - Franklin College

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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
Page 1 and 2: Seagate Technology Buyout By: Melis
Page 3 and 4: I. INTRODUCTION In 1999, Seagate Te
Page 5 and 6: 1997 1997-1998 July 1998 May 1999 J
Page 8 and 9: B. Competition Competition is the m
Page 10 and 11: to twelve months, is a new opportun
Page 12 and 13: inventories of disk drive component
Page 14 and 15: was to turn the company private sin
Page 16 and 17: STEP TWO: Seagate exchanges existin
Page 18 and 19: 100% 90% 80% 70% 60% 50% 40% 30% 20
Page 20 and 21: the value seen in its VERITAS holdi
Page 22 and 23: For all the reasons listed above, S
Page 24 and 25: large amount of confidence in Seaga
Page 26 and 27: capital structure should have a hig
Page 28 and 29: how capable a company is to pay bac
Page 30 and 31: 1.98. Although, Seagate is much low
Page 32 and 33: The next ratio we calculated was Ne
Page 36 and 37: ii. Analysis of Historical Financia
Page 38 and 39: experience? What will their earning
Page 40 and 41: Lake and other potential investors
Page 42 and 43: CFO Kenneth Lonchar stated, “We w
Page 44 and 45: X. SILVER LAKE PARTNERS INTERVIEW M
Page 46 and 47: Copy of thank you note mailed to Al
Page 48: XII. WORKS CITED Austin, Alan. Mana

Melissa Bockhold Heather Coddington - Franklin College

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