Describe the main terms of the Seagate Technology buyout? Why is Seagate undertaking this transaction? Is it necessary to divest the Verities shares in a separate transaction? What are other alternative ways to create value? The primary contemplated terms would be to sell Agate’s disk drive MFC assets including $MM In cash to Suez Acquisition Company controlled by Silver Lake Partners. The purchase would be financed by equity put up by Silver Lake and also by an, as yet, undetermined amount of debt.
In a second stage, the remaining assets of Seagate (essentially Verities stock) would be merged with Verities in a tax free stock swap. Seagate Is undertaking this transaction because It was it wants to decouple the share from Verities and also to fully realize the value of the disk business from the Verities shares. The proposed transaction was designed to allow Seagate shareholders to realize the full value for the company, by distributing Verities tax free and by selling the disk drive operations at fair market value.
An alternative would be, In order to avoid taxes, Verities would buy Seagate and spin off the Seagate disk business to Events shareholders. 2. What are the benefits of leveraged buyouts? Is the rigid disk drive industry conducive to a leveraged buyout? A positive aspect of Lobos Is that poorly managed firms can undergo valuable corporate reformation when they go private. By changing their corporate structure, replacing executive staff, unnecessary business units, and controlling costs, a company can revivalist itself and earn substantial returns.
Since this type of acquisition involves a high debt-to-equity ratio, one corporation can easily acquire another company with little capital. If the acquired company’s returns are greater than the cost of the debt financing, then all stockholders can benefit, further increasing the value off firm. Also, as a result of the high leverage and tax deductibility of leverage Interest payments, the compass bottom line Is Improved. Because the cash flows are unpredictable, the disk drive business is not an ideal target for an LOBO.
In the event that cash flow from the disk drive business misses its argue in a period, the new entity would run the risk of missing debt payments and risking bankruptcy. Recommend to be used in the transaction? What is your assessment of the pro-formal financial projections? Do they seem reasonable? Be sure to explain the valuation method you are using and how you computed the appropriate cost of capital. Seagate has $7. BIBB in operating assets. Seagate should take on no more than 80% debt, but preferably less due to the volatility of its income.
The pro formal projections seem reasonable because we expect the PC, mobile and there device (Tivoli, Oxbow) market to increase in the future which will increase the demand for storage devices. We used Potato determine the appropriate cost of capital. Rd=7. 72%. One assumption made was that the rissoles cost of capital was 5%. The debt to market value ratio is 80%. The WAC is 11. 93%.