The main terms of the Seagate Technology buyout involve selling Seagate's disk drive MFC assets, including $MM in cash, to Suez Acquisition Company controlled by Silver Lake Partners. Seagate is undertaking this transaction to create value and divest the Verities shares in a separate transaction. Alternative ways to create value are also being considered. The purchase will be financed by equity from Silver Lake Partners and an undetermined amount of debt.
In the next step, Seagate plans to merge the remaining assets, which primarily consist of Verities stock, with Verities through a tax-free stock swap. Seagate is pursuing this transaction in order to separate its share from Verities and also take full advantage of the value of the disk business from Verities shares. The objective of this proposed transaction is to enable Seagate shareholders to fully realize the company's value. This will be
...achieved by distributing Verities tax-free and selling the disk drive operations at fair market value.
An alternative option would be for Verities to purchase Seagate and then separate the Seagate disk business to distribute among Events shareholders. In terms of leveraged buyouts, what advantages do they offer? Is the rigid disk drive industry suitable for a leveraged buyout? One positive aspect of Lobos is that it provides an opportunity for poorly managed firms to undergo significant corporate restructuring when transitioning to private ownership. By adjusting their corporate structure, replacing executive staff, eliminating unnecessary business units, and implementing cost controls, a company can revitalize itself and achieve significant returns.
This form of acquisition allows one company to acquire another with minimal capital due to a high debt-to-equity ratio. If the profitability o
the acquired company exceeds the cost of debt financing, all shareholders can benefit and increase the overall value of the firm. Additionally, the high leverage and tax advantages of interest payments improve the bottom line. However, due to the unpredictable nature of cash flows, the disk drive business is not an ideal target for this type of acquisition known as LOBO.
If the cash flow from the disk drive business falls short of expectations, there is a possibility that the new entity may struggle to make debt payments and be at risk of going bankrupt. Do you recommend using this approach in the transaction? What is your assessment of the financial projections provided? Are they reasonable? Please explain the valuation method used and how you calculated the appropriate cost of capital. Seagate currently has $7 billion in operating assets. It is advised that Seagate should not exceed 80% debt, although a lower amount would be preferable due to income volatility.
Also, read about Linear Technology and Dividend Policy.
The projections for the PC, mobile, and other device markets (including Tivoli and Oxbow) appear reasonable as they indicate an expected increase in demand for storage devices in the future. The cost of capital was calculated using Potato, with Rd (cost of debt) at 7.72%. An assumption was made that the cost of capital for rissoles is 5%. Additionally, the debt to market value ratio is 80% and the weighted average cost (WAC) is 11.93%.
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