In march 2009, a team of private financers and senior managers were discussing a contract to purchase the disk drive functionality at Seagate Technology. The lucrative aspect of the purchase lay in the supposed inconsistent worth of Seagate ‘s shares in the market: Seagate’s share worth was just a small portion of the worth of its minimal interest in VERITAS Software Corp.; which is a software engineering company. The financing team had to determine how much to propose for the functional assets, as well as determine how to fund the contract. Making the analysis all the more comprehensive was the fact that unlike conservative acquisition settings, the industry to which the targeted company belonged highly recurrent in trends, dynamic and capital intensive.
Calculation of WACC for Seagate Leveraged Buyout
NPV Base Case
Free Cash Flow
DCF at Unlevered cost of equity
PV tax shield
Total value of tax shield
FCF for repayment of debt
NPV Upside case
NPV downside case
Why is Seagate undertaking these transactions (the buyout and the stock swap with Veritas)? Is this necessary to divest the Veritas shares in separate transaction? Who are the winners and losers resulting from these transactions (e.g., Seagate shareholders, Seagate management, Veritas shareholders, Silver Lake Partners)?
What are the benefits of leveraged buyouts? Is the rigid disk drive industry conducive to a leveraged buyout?
Suppose that, as an investor prior to the announcement of the Silver Lake transaction,you want exposure to Seagate’s disk drive assets but not their Veritas stake. What trade/s could you undertake to gain this exposure? How much cash would be required for your recommended trade?
Why are Seagate & VERITAS are priced the way they are and how does that relate to finance theory?
What other ‘soft-issues’ problems are caused by the relative pricing of Seagate & VERITAS?
Luczo and the buyout team plan to finance their acquisition of Seagate’s operating assets using a combination of debt and equity. How much debt would you recommend that they use? Why? (Hint: use the projections in Exhibit 8 and the information in Exhibit 11, together with your personal judgement based on the text of the case, to estimate a reasonable annual amount of debt the company should carry)
Based on the scenarios presented in Exhibit 8, and on your assessment of the optimal amount of debt to be used in Seagate’s capital structure, estimate the value of Seagate’s operating assets
What rating is the debt likely to get when the deal closes? What interest rate is the company likely to pay? How will these change over time as the business grows and the debt gets repaid?
Exhibit 10 shows that Morgan Stanley estimated Seagate’s terminal value using a multiple of EBITA. How does their procedure compare to the one you used in question 4? What growth rate assumption does Morgan Stanley’s calculation implicitly make?