Seagate Technology Buyout
The Hertz Corporation
Advanced Corporate Finance MW 2:00-3:15 PM
Question 1
On page 1, the “value-gap” is two-fold. It signifies an under-valuation of Seagate’s core disk drive operating assets due to unfavorable public market investor preferences. Furthermore, the value of the Veritas share price has caused the Veritas stake to far outweigh the value of Seagate’s stand-alone market capitalization. Since Seagate does not own at least 80% of the voting stock in Veritas, distributing the wealth intrinsic in that stake to Seagate shareholders would prove difficult due to the hefty corporate tax rate of 34% that would erode its full-value. From a sum of the parts perspective, it seems that since the Veritas shares held by Seagate appreciated by more than 200%, while Seagate’s shares only increased by 25%, the market assigned relatively no value to Seagate’s market leading position in the disk drive business. This lack of market recognition for the true value of Seagate’s assets forced management to seek action.
The management believed that the value of Seagate should be attributed to the value of its operating assets. Since the market was attributing such a high value to its Veritas stake, the market made it appear that Seagate was an investment holding company, rather than being in the disk drives business. There also seemed to be a “value-gap” in the sense that the Veritas stake is attached to business risk in the software sector while the core operating assets of Seagate have business risk in the disk drives segment of the hardware manufacturing sector. Since the value of Seagate’s stock seemed to come completely from Veritas, it could no longer give proper employee incentives and stock option compensation plans to tie one’s interests to the firm’s operations. The performance of the firm would slowly have no affect on its share price as the Veritas stake took over as its direct impact. Seagate did not want