Seagate Short Case Write-Up

1. Seagate Technology is undertaking this transaction because they believe that their value in the stock market
is greatly undervalued. Despite the management's previous efforts to improve its market value, the share price
of Seagate had no change. The option to enter into a two-fold leverage buyout transaction enables Seagate to
accomplish their goal of increasing their market value. With this divestiture, Seagate was able to restructure
their assets (sale of disk drive assets and liquidation of shares) without having to apply any corporate taxes.
The winners of this transaction include: (1) Seagate since they were able to accomplish their objective and
increase market value, (2) Silver Lake since they can benefit from the acquisition of the disk drive
manufacturing assets of Seagate, and (3) VERITAS since they can benefit from the acquisition of the
remaining assets of Seagate. The loser, on the other hand, is the government since this transaction allows
Seagate to evade paying a significant amount of taxes.
2. The base case was used throughout our entire analysis because it takes into account a more realistic mix of
the upside and downside possibilities that may happen to the company in the long run. However, during
negotiations between the buyer and seller, the buyer will present the downside case and the seller will present
the upside case to get a more favorable valuation.
3. The unlevered cost of capital for Seagates operating assets is 13.14% with an unlevered Beta of 1.459 and a
marginal tax rate of 34%. We used the risk-free rate of 5.84% (30-year government securities rate) and
assumed a market risk premium of 5%. At a constant debt-to-value ratio of 50%, we estimated WACC to be
13% using the CAPM method. We assumed the cost of debt to be equivalent to 7.72% corresponding to a
BBB rating of corporate bonds to reflect the change in the capital structure from a debt-to-value of 5% to
50%. The case also mentions Seagates target debt rating would be BBB or better.
4. a) Given the above assumption we evaluated Seagates assets at $1,860.70. We utilized the DCF method with
a 2% growth rate and a WACC of 13% which was calculated through CAPM considering a 50% constant
D/V ratio. We estimated TV to be 2,482.31 which brought to present value would add to 933.55 and added
that to the cash flows from 01 to 08 ($1,686.74) discounted at the WACC ($927.15).
b) Given the above assumption we evaluated Seagates assets at $3,540.20. We utilized the APV method and
valued the present value of tax shields separately, which significantly change the valuation. If using the same
assumption as in 4a for growth rate and the unlevered weighted cost of capital (13.14%) instead of the WACC
(13%), the additional tax shield cash flows brought to present value add to $1,669.8. To that we added the
remaining cash flows from 01 to 08 ($1,386.7) and the terminal value (+$2,452.20) both discounted at rU
($656.8 and $913.5 respectively).

5. In general, the multiple predictions resulted in operating asset value predictions that ranged from $1 to $2
Billion in excess of those calculated using the DCF/APV methods. Using 6.0x and 9.0x multiples assuming
a constant debt-to-value ratio of 50% resulted in total operating assets valued at $2.7 and $3.8 Billion
respectively. Similarly, with $1B of debt, using multiples resulted in total operating assets valued at $4.6 and
$5.5 Billion for the 6.0x and 9.0x respectively. Using a 2008 EBITA multiple range from 6.0x to 9.0x at a
discount of 15% resulted in implied growth rates of 10.03% and 11.63 % respectively. While these growth
rates are quite high, this can be explained by the exponential growth often seen in technology
companies. Importantly, the terminal value associated with a high-growth, high-risk company is limited
using the high perpetual discount rate of 15% which is greater than the WACC of 13% (constant leverage)
previously calculated.