Melissa Bockhold Heather Coddington - Franklin College

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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. 44
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. 45
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 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 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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