Melissa Bockhold Heather Coddington - Franklin College

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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
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 34 and 35: Seagate Averages (1981- 1999) Disk
Page 36 and 37: ii. Analysis of Historical Financia
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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