The other capital reorganizations alternatives are involving significant tax liability and considering the present nature of events that Seagate is a public Company, the tax liability will result to loss of the wealth of the shareholders where the capital restructuring option involves corporate taxes as well as personal tax allowably. The stock of Seagate Inc. , experience an adverse value gap, Such that the market value of the corporation Is significantly lower than the asset value.
The management have considered a number of options to restate the stock price to represent the fair value of the group. These includes divestment, discontinue and other capital restructuring which resulted to the eventual swap with VERITIES Ltd stock for Network and Storage Management Group. The management of a biblically listed company have a flaccidly duty to protect the wealth of shareholders, as well as ensure a fair offer tendering. Thereby, the management has narrowed down to opt this two staged transaction.
The expected cash flows of the Seagate were stable and established, this makes leverage buying possible, since the borrower is well credit rated, cash flows are steady and the interest rate offered is financially reasonable. Question 2 Stakeholders Interest to the reconstruction deal: All parties to the deal are considered to be winners If It Is a consented out of free The shareholders of Seagate received a 25% increase in the stock market value on the swap with VERITIES. Thereafter, the share market price trend pegged to that of VERITIES, instead of the performance of Seagate Inc. He Seagate Inc. Stock value was of late undervalued, therefore, the shareholders of Seagate, are the short term beneficially to the deal since the deal protect their wealth value by it tax free nature and deal is in cash and shares of a financially stable corporation. The consideration received is based on the asset value hence; they record a gain which is received in hares and cash. Shareholders of Seagate are the loser, since the assets on exchange are undervalued, and they have limited access to accurate reliable information to make a sound decision.
Considering the theory of the Arbitrage Pricing theory, the shares are expected to pick up a rise in prices accounted by the arbitrage. Silver Lake Partners: They will be the ownership interest controllers. They will enjoy heavy tax shield due to the large debt: equity ratio. Management incentives, undervalued asset, operational efficiency since it a private investment VERITIES shareholders: Winners: The first reconstruction resulted to 200% increase in the market value of VERITIES, considering this option involves swap for a segment which coups higher return than of the previous deal.
Considering Exhibit 5, VERITIES introduced debt in its capital structure of $ MM, in 1997; this resulted to increase in the Equity Beta of the corporation and subsequently the weighed cost of capital. It is a financial relieve to the VERITIES shareholders, since the swap will increase its operational earnings as well as reduce the weighted cost of capital and subsequently, the equity beta is expected to reduce and reflected in the market by a rise in its share price, hence they benefit. Seagate Management: The management is headed by Lucas the CEO; some portion of management will lose their Jobs once the deal is sealed.
Lucas and the Finance manager are great hold to the acquirer and stands to be somewhere behind making the deal possible by colluding with private investors to secure the control of ownership of Seagate corporation by executing the capital reconstructing transaction. When, the company status is converted to private, the management will enjoy exorbitant management incentives. The management are the greatest winners because of the informational efficient advantage that they enjoy. Free cash flow, all the assumptions prescribed followed, no additional assumptions is considered.
Question 4 The maximum amount of cash in the LOBO is equal to the discounted free cash flows Given the interest rate of the EBB rated debt is 9. 18%, and assuming that the terminal value beyond the 2008 is $ 0. 00, we have no model to forecast the future free cash flows beyond 2008 1+ 2+ + 924. 2/(1 . 0981)A 4+ 1 124/(1 . 0981)AY + 1313. 56/(1 . 0981)AY + 1440/(1 . 981)A 7 + 1581 . 82/ (1 . 0981)AY = 129. 5+ 594. 3 + 703. 8 + 650. 4 + 724. 52 + 775. 5 + 778. 68 + 748. 2 = $5. 1069 Billion. Seagate is rated as EBB in the credit rating, BIT coverage in the year 1999 is 8. %, as per the history of buyout the debt to equity ratio is over 6; 4, since this debt ratio is used to be associated with optimally low cost of overall cost of capital in the technology sector data given. Question 5 The debt is borrowed between B and B rated securities, assume the weight of each is 0. 5, and there rate are 9. 18% and 10. 44% respectively. Let Kid be the cost debt UAPITA, Eek be the cost of equity capital and WAC the overall cost of capital, is the equity risk beta. Kid = 0. 5*9. 18) + (0. * 10. 44) Eek= RFC+ (risk premium) We take the risk free rate of the long term government securities since it relatively stable representation of the future risk free rate, whereby the free cash flows to be discounted are. 5. 84% + (7. 5)1. 2 = 14. 84% The WAC= debt weight* Kid + equity weight* Eek Given debt weight is 0. 8 and the equity weight is 0. 2 Therefore, WAC= Question 6 Given that the discounting rate is WAC, 10. 77% Terminal value = cash flow of 2008/ (WAC-G), where G, is the perpetual growth rate.
Assuming that the sum of the discounted cash flows is equal to the value of the company, then the amount of debt issued will be 80% of $ 9. Biliousness’s = $ 7. 3 Billion. This amount is reasonable for a leverage buyout deal of a leading world tech company. If debt increases the equity cost of capital raises, and tax shield increases too, which set off the interest expenses significantly. Question 7 If the debt reduces from 1000 – millions therefore the cost of capital readjusts favorably. Operations Profitability: The value amount of value increase due to operational profitability is value= 9125. 667+ 228-136. = $ 9. 2169 Billions Question 8 The Multiple Approach assumes that the business will be sold at the end of forecasted periods, therefore the terminal value is Inconsistencies of the multiple approach models: 1 . The Multiple Approach requires careful use, since the values of multiples keep on changing. 2. Applying the current market multiples do not consider that the current multiples may be lower of higher than historical standards. 3. The value drivers are the inputs used to compute the terminal value and due to the uncertainties involves, there is risk of volatility of the perpetual free cash flows.