Seagate Technology Buyout
1. We can examine the stock prices of Seagate and Veritas on Exhibits 3 and 5. Exhibit 3 shows us that Seagate had a stock price of 64.25$/share on March 10th 2000. Veritas stock price is disclosed on Exhibit 5 with 168.69$/share at that date, which is an increase in value of more than 200% within the last six months (Exchibit4). Moreover, we can assert that the pre-tax value of Veritas stake, which is held by Seagate, has notably exceeded Seagate’s market capitalization from November 1999 onwards. This is the result of selling Seagate’s Network & Storage Management Group (NSMG) to Veritas for 155 million shares of Veritas stock. Seagate became the largest stockholder of Veritas with an ownership over 40% through this transaction. Since, Seagate’s stock price is tied to Veritas’ stock price after the transaction, I would assume that Veritas is overvalued or Seagate is undervalued. To exploit that value gap, you could for instance short sell Veritas shares and wait till the value of the shares decrease. The value gap should become smaller, if every MBA student took this position. 2. There are many reasons why Seagate is priced low. The disk drive market is highly volatile and experienced declining revenues through fierce competition in the past. Despite Seagate’s market-leading position and its large size, the market was not valuing its disk drive business as expected. In contrast, Veritas is operating within another industry where significant growth was assumed. Although Veritas is a smaller company, the market evaluated its stock with a much higher price. Since the market value of a company is rather assessed by its potential future performance and growth than by its book value, Veritas is better priced than Seagate. 3. The low share price of Seagate in comparison to Veritas caused a bad mood among Seagate’s employees which resulted in worse work performance and hence affected the quality of the products. It was very difficult...
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