Seagate Technology Buyout Harvard Case Solution & Analysis


Seagate Technology has been running a successful business of manufacturing and selling disk drives for decades. However, the company realized that its stocks are not trading at the prices at which they need to be traded. Therefore, the company decided to go for a merger with its associate company,Veritas. For this, a proposal has been proposed by the Silver Lake, which is under consideration by the Seagate.

Analysis and Recommendations

Seagate Technology’s NPV stands at $1.650 Billion, which will be the buyout price of the Seagate.However, this price is calculated on the base case and it may increase or decrease to $2.102 billion or $ 1.169 billion. The NPV has been calculated on the basis of WACC, which has been calculated at 7.64%. Furthermore,the terminal value of the company has been calculated at $9.837 billion, which shows the position or value of the company at the end of 2006(Refer to Excel file).

The cash flows of Seagate for the next 7 years show a positive inflow in all the three cases, which is a positive sign for the company. It also indicates that the company will have sufficient funds to cover their costs and run the operation of the company.Seagate has several options to increase its stock price, which is its main motive. The company can repurchase its stocks from the market, which will ultimately increase their share price. This option has already been exercised, but did not prove to be useful for the company. Another option is that the company can sell the shares of Verit as,which it is holding. However,the selling of shares will bring liability to the company in the form of tax at the rate of 34%. As a result, both the options are although applicable, however they are not feasible for the company.

The third option is a merger or spin off. Considering that the buyout price is equivalent to value (NPV) of the Seagate, the company will receive $1650 million against $765 million cash and $2074 million of operating assets. By selecting this option, Seagate can avoid any tax liability as it is re organizing under the Internal Revenue Code.Moreover, Seagate’s EPS (Earnings per Share) will be increased as fewer shares will be traded in the market, i.e.$109 million as compared to $128 million (1:0.85).

Through the merger, the share holders will also be be ne fitted as they will get the shares of VERITAS that have shown a significant growth in the past few months.As a result, the wealth of the shareholders will ultimately increase that will induce them to give their consent for the transaction, which is a mandatory requirement for the merger.Seagate Technology Buyout Case Solution

Therefore, considering the above mentioned facts, it is recommended for Seagate to go for merger as it is beneficial for the company.However, there are certain important factors that need to be considered. The most important is the source of finance for carrying out the transaction. The assets of the company stand at $7072 million, which can be leveraged to finance the transaction. However,this will only add to the liability of the company in the form of finance costs. Seagate will also need to maintain its rating to BBB in order to create value and demand for their bonds.

The new capital structure suggested to the company should be in the debt to equity ratio of 40:60. This is the optimal capital structure, which will enable the company to sustain liquidity. The company has performed well in the past and therefore, based on historical data, it can be concluded that the merger will prove to be beneficial for the company...........................

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