Financial Policy and Strategy

Jalen Jones @02768446

Dr. William Brent

Financial Policy and Strategy

GFIN-590-01

February 21, 2019

Seagate Case Study

Abstract

AnaAt the time, Seagates market share was 21.1% and was receiving $6.5 billion in annual revenue. Henceforth, Seagate began to have a good deal of competition from online data storage companies which raised several problems for their corporation.

Statement of Problem

In early 2000 Luczo met with several private investors and managers to speak about acquiring the disk drive operations and restructuring the company. One of the main factors for the buyout was that the market value of Seagate was dropping significantly regardless of their market leading position. The company only had a fraction of main assets invested in an independent manufacturer of storage called, VERITAS, which was $21 billion. Soon, this market value would become greater than the entire Seagate market cap. This went along with their assets they already possessed from their own disk drive operations. Thus, many issues arose when figuring out how to finance this deal.

The management of both parties agreed that there was a major “value gap” between the two factors which was very true. This would entice very large tax liabilities if Seagate every tried to sell their shares they had with VERITAS. Also, the stock market was favoring the internet business at the time because they manufactured cheaper data storage. These two factors reduced the full value in the Seagate stock price. Another issue was trying to get shareholders from VERITAS to pay a reasonable amount for the Seagate stock while allowing a solid rate of return for the risks being taken. Also, figuring out how the management terms would play out during the restructuring period was very pivotal. All of the needs and concerns of VERITAS needed to be honored if this deal would want to go down, but this was a continuous struggle for all parties involved.

Alternative Solutions

In the midst of trying to get together a deal Seagate was able to create several alternative solutions to help them in this case. These solutions were designed to help increase the value of their shares. The first was to repurchase their own shares in the open market which had already been unsuccessful thus far. Although this is an okay idea, the intrinsic equity value doesn’t always correct itself when it isn’t on good terms with the market anyway. Secondly, the company could sell their shares in VERITAS, but the tax liability is strong and limitations upon agreement. Lastly, Seagate could perform a merger with a tax-free spin-off. This would allow VERITAS to come in and take over an individual section of the business entity.