Seagate Essay examples

1635 Words Apr 16th, 2013 7 Pages
“Seagate Buyout” | Case Study Analysis |

1. Why is Seagate undertaking this transaction? Is it necessary to divest the
VERITAS shares in a separate transaction? Do the shareholders of VERITAS gain or lose from this transaction?

Under the original organizational structure, Seagate’s management believed its current stock price is undervalued by the current market and thus not delivering the value to shareholders of Seagate stock. At this time, Seagate also held a significant stake in VERITAS stock, nearly 40%, acquired under a previous transaction. Not long after this initial transaction had occurred, the value of VERITAS stock increase nearly 200%, as Seagate’s stock rose only 25% during that same period. The value of the
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Further, we would pay off the debt using our excess free cash flow to pay off the debt. By the end of the 5th year, we would sell the firm and gain from any excess value found within the firm.

| Yr 0 | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 | D/E ratio | 0.86 | 0.78 | 0.45 | 0.24 | 0.10 | 0.00 |

4. Based on the scenarios in Ex. 81, and on your assessment of the optimal amount of debt to be used in Seagate's capital structure, how much are Seagate's operating assets worth? Assume that of the $765 million in cash that the buyout team will acquire as part of the transaction, $500 million is required for new investment in net working capital and $265 million is excess cash. Also, assume that the buyout team plans to pay down its debt as cash flows permit during the forecast period. Estimate the value of Seagate's operating assets under the following two scenarios:

* Scenario (A): The buyout team plans to maintain the terminal debt level in perpetuity. * Scenario (B): Beyond the forecast period, the buyout team plans to maintain its debt at a constant percentage of the firm's market value.

In Scenario A, the Debt would remain at 0 for good. This results in a D/V ratio of 0 which gives us a WACC of 9.21. Using the WACC to derive the Enterprise value of the company, it is found to be $3.043B. Subtracting the debt of $1.25B, we have a Value of Equity of $1.79B. Subtracting the $765M that is

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