Financial

Management
Seagate Technology Buyout

Group 1

M10218001 Xenia Peng

M10221804 Emily Hong
M10218025 David Huang
M10218007 Alan Hsu
F10208009 Charis Cheng

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1. Why is Seagate undertaking this transaction? Is it necessary to divest the
Veritas shares in a separate transaction? Who are the winners and losers
resulting from the transaction?

In May 1999, Seagate Technology sold its Network & Storage Management
Group to VERITAS Software. It received approximately 155 million shares of VERITAS
stock, making it VERITASs largest stockholder with an ownership stake over 40%.
However, the market did not recognize the full potential value of VERITASs stake
and making Seagatess disk drive business with negative value. Therefore, it was
becoming more difficult to provide proper incentives to employees, and convince its
shareholders. It is necessary to have this transaction. Otherwise, Seagate had to pay
huge tax liabilities when they sold VERITAS stocks.
In addition, winners are the majority shareholders of Seagate ,VERITAS and
Silver lake group. As Seagates stock price increased 25% and shareholders of
Seagate can benefit from it. For VERITAS, their stock price increased more than
200%. For Silver lake, they was optimistic about the disk drive industry so that it will
generate great revenue in the future. The loser will be the minority shareholders of
Seagate as Seagates shares may be lack liquidity.
2. What are the benefits of leveraged buyouts? Is the rigid disk drive industry
conducive to a leveraged buyout?

LBOs have become very attractive as they usually represent a win-win situation
for the financial sponsor and banks. The financial sponsor can increase the returns on
his equity by employing the leverage, and banks can make substantially higher margins
when supporting the financing of LBOs as compared to usual corporate lending,
because the interest chargeable is that much higher. Investment returns from buyouts
came from business efficiency improvements, improved management incentives, and
increased interest tax shields when the buyout is financed with debt. In addition, in
some cases buyouts provided an opportunity to purchase undervalued assets at a
favorable price.
However, to support the high levels of debt, LBO firms typically targeted
companies that operated in mature industries, generated stable and predictable cash
flows, and had significant tangible assets that could be used as collateral. On the
contrary, LBO firms tended to avoid technology businesses where the combination of
rapid growth, short product cycles, and substantial demand uncertainty made cash
flows hard to predict. The lack of tangible assets in many technology businesses
reduced attractiveness to LBD specialists. Accordingly, the characteristics of the disk
drive business did not make it an easy place to do LBOs. Price competition was intense,
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 product life cycles were extremely short, and the technological sophistication of disk
drives required large expenditures on R&D, as well as manufacturing capacity to meet
customers specification quickly. For these reasons, LBOs were taken very
conservatively in rigid disk drive industry.

3. Luczo and the buyout team plan to finance their acquisition of Seagates
operating assets using a combination of debt and equity. How much debt
would you recommend that they use? Why?

Free Cash Flow as following:

V=569 million
The financing team are willing to pay 765 million, and reduce present value of free
cash flow. They assumed to put 765m -569m=196m in equity, and 569m in debt.
Because we can use free cash flow to repay the debt.
Debt= Present value of free cash flow
Equity=(1- Present value of free cash flow)
Cost of Equity=5.84%+1.2*(7.72%-5.84%)=8.096%
WACC=1.96/7.65*8.096%+5.69/7.56*7.72%*(1-40%)=5.56%
Year Ending June 30

1999 2000 2001 2002 2003 2004 2005 2006

Base Case ($ Million)

Revenues

6,619.00 7,417.00 8,564.00 9,504.00 10,416.00 11,359.00 12,350.00

Gross Margin

1,264.00 1,409.00 1,696.00 2,043.00 2,312.00 2,624.00 3,026.00

EBITA 141.00 189.00 316.00 449.00 499.00 614.00 724.00

Depreciation 625.00 626.00 642.00 666.00 708.00 726.00 729.00

EBITDA

766.00 815.00 958.00 1,115.00 1,207.00 1,340.00 1,453.00

-Capital Expenditures 627.00 690.00 720.00 795.00 700.00 725.00 750.00

Net Working Capital(=Revenue*0.26)

1,773.00 1,720.94 1,928.42 2,226.64 2,471.04 2,708.16 2,953.34 3,211.00

-NWC INCREASERevenue*26%- NWC (52.06) 207.48 298.22 244.40 237.12 245.18 257.66

FREE CASH FLOW 191.06 (82.48) (60.22) 75.60 269.88 369.82 445.34

Discount rate=15%(assumed by MORGAN) 0.8695652 0.7561440 0.6575160 0.5717530 0.4971770 0.4323280 0.3759370

Present of FREE CASH FLOW 568.88 166.14 (62.37) (39.60) 43.22 134.18 159.88 167.42

The proposal was a complicated two-staged transaction(see Exhibibt6). In the first

stage, Seagate would sell all of its disk drive manufacturing assets, including
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approximately $765 million of cash, to a newly formed company ("Suez Acquisition
Company") controlled by Silver Lake. And Seagate got the equivalent of these cash.
In the second stage of the transaction, the remaining Seagate shell corporation,
whose assets would then consist of 128,059,966 VERITAS shares, a few
miscellaneous equity investments, and proceeds from the Seagate buyout, would be
merged with VERITAS through a tax-free stock swap. VERITAS executives indicated
they would be interested in acquiring the Seagate shell corporation in exchange for
109,330,300 VERITA shares.

4. Based on the scenarios presented in Exhibit 8, and on your assessment of the

optimal amount of debt to be used in Seagates capital structure, how much are
Seagate operating assets worth? For both of the assumptions listed, estimate
the value of Seagates operating assets. Assume that of the $800 million in cash
that buyout team will acquire as part of the transaction, $500 million is required
for net working capital and $300 million is excess cash.
A. Assume that the buyout team plans to maintain its debt at a constant
percentage of the firms market value.
B. Assume that the buyout team plans to pay down its debt as cash flows permit
until a terminal debt level of $700 million reached.

We use the average revenue growth rate of downside case to be our Growth rate.
Growth rate=6.71%, and we assume the FCF would grow forever.

Base Case ($ Million)

discount rate (exhibit 9) 15% tax rate (exhibit 4) 34% growth rate 6.71%
1999 2000 2001 2002 2003 2004 2005 2006 2007~
Revenues $6,619 $7,417 $8,564 $9,504 $10,416 $11,359 $12,350
Gross Margin 1,264 1,409 1,696 2,043 2,312 2,624 3,026
EBITA 141 189 316 449 499 614 724
Depreciation 625 626 642 666 708 726 729
Capital Expenditures 627 690 720 795 700 725 750
Free Cash Flow $91 $61 $131 $167 $337 $406 $457 $5,879
Pay Debt $700
DFCF $79 $46 $86 $96 $168 $176 $172 $1,922
PV $2,744

Upside Case($ Million)

discount rate (exhibit 9) 15% tax rate (exhibit 4) 34% growth rate 6.71%
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 1999 2000 2001 2002 2003 2004 2005 2006 2007~
Revenues $6,619 $8,185 $10,146 $11,283 $12,626 $13,961 $15,404
EBITA 141 365 689 783 867 1000 1167
Depreciation 625 626 642 666 708 726 729
Capital Expenditures 627 690 720 795 700 725 750
Free Cash Flow $91 $177 $377 $388 $580 $661 $749 $9,642
Pay Debt $700
DFCF $79 $134 $248 $222 $288 $286 $282 $3,152
PV $4,690

Downside Case ($ Million)

discount rate (exhibit 9) 15% tax rate (exhibit 4) 34% growth rate 6.71%
1999 2000 2001 2002 2003 2004 2005 2006 2007~
Revenues $6,619 $7,393 $7,797 $8,310 $8,801 $9,269 $9,759

EBITA 141 189 322 363 378 403 407

Depreciation 625 626 642 666 708 726 729

Capital Expenditures 627 690 720 795 700 725 750

Free Cash Flow $91 $61 $135 $111 $257 $267 $248 $3,187

Pay Debt $700

DFCF $79 $46 $88 $63 $128 $115 $93 $1,042

PV $1,655