Seagate-Veritas: Anatomy Of A Complicated Deal

A complicated deal this week turned the world's largest hard drive manufacturer into a start-up, and a leading storage software vendor into a hardware vendor

Seagate Technology Inc., Scotts Valley, Calif., will go private as part of a $20 billion transaction involving Veritas Software Corp., Mountain View, Calif., and an investor group, executives of the companies involved said Wednesday.

Veritas will acquire all of the Veritas shares currently held by Seagate, as well as Seagate's securities in several hardware and software vendors.

Seagate's core operating businesses, including hard disk and tape drive manufacturing and $800 million in cash retained, will then be acquired for $2 billion in cash by an investor group, which includes the drive vendor's management team.

Seagate's shareholders will receive common shares of Veritas plus cash in exchange for their Seagate common stock. The total price is about $77.50 per share of Seagate stock, a premium of about 26 percent over the company's close Wednesday.

The deal is expected to be finalized during the third quarter of this year.

It is a tough deal to understand, said John Donovan, vice president of Trend Focus Inc., a Palo Alto, Calif.-based research firm.

It is great for the company's management team, which with its investment partners is essentially paying $1.2 billion out-of-pocket for a profitable $7 billion company, Donovan said. "I'd like to get a deal where I could get something for 30 or 40 cents on the dollar," he said.

The deal removes a thorn in the sides of both Seagate and Veritas. Seagate currently owns about 128 million shares of Veritas which, because of their value, represent a huge tax liability, should the company ever decide to sell them. Also, that block of shares represents an opportunity for a hostile company to acquire a sizable chunk of Veritas, said Mark Leslie, chairman and chief executive of Veritas.

By going private, Seagate is better able to focus on its core business while ignoring Wall Street, said Steve Luczo, company president and chief executive. "It's been clear [Seagate] stock has been trading at a significant discount to the value of the company and its various assets," he said.

Seagate also hopes the move enables it to better attract employees in a tight market, especially as it could one day re-enter the public market, Luczo said. "Having a private company equity improves our recruitment and retention," he said.

Competitors will be watching the deal closely, said Donovan. "If you are another [hard] drive company, you have to wonder what [Seagate's] positioning might be, now that they don't have to worry about the [Securities and Exchange Commission]," he said. "They could suddenly drop prices down to $50, and cause three or four vendors to drop out of the market."

As part of the deal, Veritas gets Seagate's securities in several other vendors, including flash memory manufacturer SanDisk Corp., Fibre Channel switch vendor Gadzoox Networks Inc., drive component manufacturer CPC Inc., and speech recognition software developer Dragon Systems Inc.

Veritas currently has no plans for how it will handle these new assets, and reserves comment until the deal is finalized, a spokeswoman said.

One immediate result of the deal for Veritas, however, is that on Wednesday night, after the deal, it replaced auto parts retailer The Pep Boys--Manny, Moe & Jack on the S&P 500 listing, the spokeswoman said.

This is not the first sale of Seagate assets to Veritas. Last June, Seagate sold its Network Storage Management Group to Veritas for about $3.1 billion in Veritas stock.CRN