Seagate to become private in $20 bn deal

Seagate will sell its disk-drive operations for roughly $2 billion in cash to an investor group led by Silver Lake Partners, a technology-oriented buyout group founded last year by a group of prominent Silicon Valley executives. Seagate’s current management will continue to run the company, which will be called Seagate Technology; along with Seagate employees, they will own about a third of the venture.

Most of the value to Seagate shareholders, however, comes from a stock swap by Veritas. They will receive a total of 109.3 million Veritas shares, plus some additional cash, for the 128 million Veritas shares now held by Seagate as well as its holdings in four other technology companies and some of the cash on Seagate’s books.

For each Seagate share, Veritas is swapping 0.467 of its shares plus $5 in cash. Based on the closing prices of the two stocks yesterday, that amount totaled $71.55 and represented a 14% premium for Seagate shareholders.

In New York Stock Exchange composite trading at 4 p.m. Wednesday, Seagate shares were at $62.75, off $4.625. In Nasdaq Stock Market trading at 4 p.m., Veritas shares were at $142.50, off $12.4375. But shares of both companies were up sharply after hours; Seagate traded at $74, while Veritas traded at $158.

Veritas makes software that is used to manage the disk-drive operations at big companies. Because that part of the technology world has been a Wall Street darling in recent months, Veritas shares have roared up nearly sixfold since the fall. As a result, the value of the shares held by Seagate have an indicated value of $18 billion, more than Seagate’s $15 billion market capitalization. The situation caused many Seagate shareholders to press management to find some low-tax way of locking in those gains.

Taking Seagate’s disk-drive operations private, meanwhile, helps buffer the company from the pressures associated with being a public company in one of the tech world’s most cutthroat markets. One of Seagate’s biggest competitors, the disk-drive operations of International Business Machines

Corp., has some of the benefits of a private company, because its results are folded into the much lager results of IBM.

Alexa McCloughan, an analyst with International Data Corp, said the newly private Seagate could be a more aggressive competitor, because it could cut prices and pare its balance sheet without having to worry about Wall Street reactions. Roger McNamee, a co-founder of Silver Lake Partners who spearheaded the deal, vowed that the new owners will invest heavily in the private entity. Though technically a leveraged buyout, McNamee said about half of the $2 billion will come from equity financing, much more than other deals that have taken public technology companies private.

"The disk-drive industry does not get a lot of respect," McNamee said. "But we think this is a business that is increasingly significant in the Internet age."

Stev Luczo, Seagate’s chief executive, said going private would make it easier to recruit employees, because they and the new owners would hold shares that would become more valuable if the company were to go public again. He said he expected that to happen, but wouldn’t give a timetable.

One institutional investor in Seagate, who requested anonymity, said he objected to the sale price, noting that the $2 billion represented less than 30% of Seagate’s revenue for its past fiscal year. "Seagate is a very healthy company," he said. "They are the price leader and they are the technology leader."

Luczo defended the price tag, and noted that he didn’t take part in the board vote approving the deal, to avoid potential conflicts of interest. The company solicited other bids but received none better, he said. And he added that if Seagate were really worth more, "then why isn’t the stock trading any higher?"