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Seagate Technology Buyout

Harvard Business School Case #201-063


Case Software #XLS042

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Table A Market Share in the Worldwide Disk Drive Industry, 1999

Total Marketa

Number of units shipped


Seagate 0.211
Quantum 17.1
IBM 14
Maxtor 13.3
Fujitsu 12.3
Western Digital 11.1
Samsung 5.9

Total sales ($millions) 25273

Source: “Disk Drive Quarterly Report” (March 2000) by Salomon Smith Barney.
aIncludes mobile.
bAmount is not material.
Enterprise Desktop

0.41 0.211
7.2 20.5
34.6 6.1
b 17.7
8.8 12.4
3.8 14.6
b 7.5

7438 14627
Exhibit 1 Worldwide Hard Disk Drive Industry Historical Performance and Projections, 1991-2003E

1991 1992 1993 1994

Total Sales (000s of units) 33.1 38.4 51.8 69


Y/Y % Change 16% 35% 33%

Total Revenues (millions of $) 24300 26200 21730 22966


Y/Y % Change 8% -17% 6%

Source: Computer Industry Abstracts (various issues) and “Disk Drive Quarterly Report” (June 1999) by Salomon Smith Barney.
1995 1996 1997 1998 1999 2000E 2001E 2002E 2003E

90 106.8 129.3 143.6 165.9 187.8 212.5 238.1 268.2


30% 19% 21% 11% 16% 13% 13% 12% 13%

22991 27596 27340 25483 25273 26640 28409 30450 32699


0% 20% -1% -7% -1% 5% 7% 7% 7%

99) by Salomon Smith Barney.


Exhibit 2 Historical Operating Performance and Capitalization Ratios for Seagate Technology and U.S. Disk Drive Industry (198

1981 1982 1983 1984 1985 1986 1987

Seagate

Sales 9.79 40.45 110.41 343.9 214.65 459.84 958.07


% Growth 313% 173% 211% -38% 114% 108%

EBITDA 0.87 10.7 18.82 63.51 0.07 58.34 208.24


% Sales 9% 26% 17% 18% 0% 13% 22%

EBIT 0.65 9.89 16.16 55.72 -12.01 39.18 180.63


% Sales 7% 24% 15% 16% -6% 9% 19%

Assets 9.47 43.47 157.25 214.72 275.23 305.08 814.12


Depreciation & Amortization 0.22 0.81 2.65 7.8 12.08 19.17 27.6
CAPX 2.45 5.04 38.83 42.66 31.22 38.68 78.4

Debt/Book Assets 19% 1% 5% 5% 13% 5% 37%


Debt/Mkt. Assets NA 0% 1% 2% 9% 2% 14%
(Debt-Cash)/Book Assets 18% -27% -10% -2% 11% -10% -11%
(Debt-Cash)/Market Assets NA -6% -2% -1% 7% -5% -4%
EBITDA Interest Coverage 10.12 57.84 47.05 73.51 0.04 20.26 41.01
EBIT Interest Coverage 7.56 53.46 40.4 64.49 -6.84 13.61 35.57

Disk Drive Industry Medians

EBITDA as % of Sales 9% 6% 7% 1% -4% 9% 8%


EBIT as % of Sales 5% 3% 3% -4% -10% 5% 5%
Debt/Book Assets 19% 9% 5% 12% 19% 13% 16%
Debt/Mkt. Assets 7% 4% 1% 5% 7% 5% 7%
(Debt-Cash)/Book Assets 9% -5% -12% -6% -5% -7% -11%
(Debt-Cash)/Mkt Assets 0% -2% -6% -2% -3% -4% -4%
EBITDA Interest Coverage 3.31 3.46 4.12 -1.58 -3.19 6.2 6.37
EBIT Interest Coverage 2.19 1.42 2.34 -3.37 -7.57 2.25 1.94

Source: Casewriters’ estimates based on data compiled from Compustat.


and U.S. Disk Drive Industry (1981 to 1999)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

1265.97 1371.57 2413.18 2676.98 2875.27 3043.6 3500.1 4539.57 8588.35 8940.02
32% 8% 76% 11% 7% 6% 15% 30% 89% 4%

150.77 90.97 297.24 255.57 309.04 439.05 449.17 629.85 1004.53 1521.03
12% 7% 12% 10% 11% 14% 13% 14% 12% 17%

100.4 12.96 179.32 117.31 139.91 284.03 310.96 442.98 627.38 1019.83
8% 1% 7% 4% 5% 9% 9% 10% 7% 11%

1093.95 1076.77 1851.46 1880.06 1816.6 2031.19 2877.53 3361.26 5239.64 6722.88
50.37 78.02 117.91 138.26 169.13 155.02 138.21 186.86 377.15 501.2
284.41 78.09 102.38 90.87 90.66 173.57 197.68 353.43 906.94 890.46

28% 29% 31% 23% 18% 14% 19% 16% 15% 10%
20% 24% 28% 27% 16% 14% 18% 12% 11% 6%
20% 11% 17% 9% -10% -17% -27% -21% -7% -24%
14% 9% 15% 11% -9% -17% -26% -15% -5% -13%
6.88 3.77 6.1 6.01 9.09 18.67 17.05 19.11 17.99 43.66
4.58 0.54 3.68 2.76 4.11 12.08 11.81 13.44 11.24 29.27

6% 7% 10% 9% 9% 4% 3% 5% 7% 9%
2% 5% 6% 4% 6% 0% -2% 2% 4% 8%
12% 13% 10% 13% 16% 19% 12% 10% 13% 6%
8% 8% 9% 8% 16% 13% 7% 3% 4% 1%
0% -5% -7% 2% -1% -9% -4% -8% -6% -21%
-3% -2% -4% -1% -3% -3% -2% -3% -5% -8%
8.15 5.74 6.03 4.06 9 4.38 5.58 3.59 7.06 13
4.58 2.71 3.3 1.55 4.31 -0.05 0.37 1.84 5.04 8.52
1998 1999

6819 6802
-24% 0% 1137%

451 1011
7% 15% 239%

-138 398
-2% 6% 153%

5645 7072
589 613
709 603

12% 10%
8% 8%
-20% -13%
-13% -10%
8.84 20.25
-2.71 8.29

6% 6%
-1% 1%
14% 9%
7% 4%
-9% -23%
-5% -5%
4.2 -0.09
-2.04 -2.91
Exhibit 3 Summary Financial Data on Publicly Traded Hard Disk Drive Manufacturers

Seagate Technology Quantum HDDa


Jun97 Jun98 Jun99 Mar97 Mar98 Mar99

Income Statement ($ million)


Sales 8940 6819 6802 4591 4615 3599
Cost of Goods Sold 6918 5830 5250 4093 4242 3308
Gross Margin 2022 989 1552 498 373 291
EBITDA 1521 451 1011 146 -6 -61
Depreciation + Amortization 501 589 613 109 68 71
Operating Profit 1020 -138 398 37 -74 -132
Interest Expense 35 51 48 20 11 9
Net Income 658 -530 1176 41 -53 -153
Capital Expenditures 890 709 603 164 119 82

Balance Sheet ($ million)


Cash and Equivalents 2284 1827 1623 NA 325 524
Net Receivables 1041 799 872 NA 586 392
Inventories 808 508 451 NA 212 148
Net Property, Plant, and Equipment 1787 1669 1687 NA 228 199
TOTAL ASSETS 6723 5645 7072 NA 1646 1470
Accounts Payable 863 577 714 NA 401 342
Short-term Debt 1 1 1 NA 0 0
Long-term Debt 702 704 703 NA 109 115
Shareholders’ Equity 3476 2937 3563 NA 906 791
Net Working Capitalb 2717 2241 1773
NA 739 709
Capital Market Information ($ million)

Year-end Market Equity Capitalization 5861 5844 8620 NA NA NA


Equity Betasc 1.2 0.8
Total Book Debt (3/10/00) 704 110
Debt Rating BBB B2
Stock Price (3/10/00)—$/share 64.25 8.875
Shares Outstanding (3/10/00)—millions 227.2 82.6

Source: Data compiled from Compustat and SEC Filings.


aQuantum HDD was floated in August 1999 as a separately traded subsidiary of Quantum Corporation, containing just the hard
bNet Working Capital = Total Current Assets – Total Current Liabilities (excluding Short-Term Debt).
cEquity betas estimated using daily returns over the six-month period from 9/1/99 to 3/1/00.
Western Digital Maxtor
Jun97 Jun98 Jun99 Dec96 Dec97 Dec98

4178 3542 2767 799 1424 2409


3464 3187 2562 842 1287 2034
714 355 205 -43 137 375 7468
365 -41 -188 -191 -32 134
63 107 131 47 66 74
302 -148 -319 -238 -98 60 670
0 12 33 18 37 29
268 -290 -493 -256 -110 31
156 199 107 54 82 95

208 460 226 31 33 258


546 369 273 89 248 318
224 187 144 81 155 153
248 347 238 92 99 108
1307 1443 1022 315 555 863
418 330 336 110 207 428
0 0 10 204 245 5
0 519 534 229 224 145
620 318 -154 -327 -221 169
364 464 72 93 440 170

2716 1043 589 NA NA 1320


0.6 1
236 114
B2 B1
5.1875 11.625
129.1 113.2

ration, containing just the hard disk drive operations. As a result, there is no information on historical stock prices or market capitalization,
prices or market capitalization, prior to that date.
Exhibit 5 Summary Financial Data on VERITAS Software

VERITAS Software
Dec96 Dec97 Dec98

Balance Sheet ($ Million)

Cash and Equivalents 67.6 151.3 278.2


Net Receivables 16 30.3 52.7
Inventories NA NA NA
Net Property, Plant, and Equipment 7 10.1 26.5
TOTAL ASSETS 94.5 241.9 349.1
Accounts Payable 1.8 1.6 5
Short-term Debt 0.1 0 0
Long-term Debt 0.5 100 100
Shareholders’ Equity 75 104.2 169.9

Stock Market Information

Total Book Debt (3/10/00)—$ Millions 451


Equity Betaa 1.81
Stock Price (3/10/00)—$/Share 168.69
Shares Outstanding (3/10/00)—Millions 393.6

Source: Compustat and SEC Filings.


aEquity beta estimated using daily returns over the six-month period from 9/1/99 to 3/1/00.
Exhibit 8 Projeced Operating Performance of Seagate Disk Drive Business

Year Ending June 30,


2000 2001 2002 2003 2004 2005 2006

Base Case ($ million)


Revenues 6619 7417 8564 9504 10416 11359 12350

Gross Margin 1264 1409 1696 2043 2312 2624 3026

EBITA 141 189 316 449 499 614 724

Depreciation 625 626 642 666 708 726 729

Capital Expenditures 627 690 720 795 700 725 750

Upside Case ($ million) 0 0.103546 0.184727 0.187184 0.212174 0.229069 0.247287


Revenues 6619 8185 10146 11283 12626 13961 15404
0 0.931217 1.18038 0.743875 0.737475 0.628664 0.611878
EBITA 141 365 689 783 867 1000 1167

Downside Case ($ million)a 0 -0.00324 -0.08956 -0.12563 -0.15505 -0.184 -0.2098


Revenues 6619 7393 7797 8310 8801 9269 9759
0 0 0.018987 -0.19154 -0.24248 -0.34365 -0.43785
EBITA 141 189 322 363 378 403 407

Source: Casewriters’ estimates based on revenues and EBITA projections contained in SEC filings.
aThe “downside case” is based on the “buyer case” described in the first VERITAS and Seagate Joint Proxy Statement/Prospectu
Base Case 1 7417 8564 9504 10416
Upside 2 8185 10146 11283 12626
Downside 3 7393 7797 8310 8801

Base Case 1 189 316 449 499


Upside 2 365 689 783 867
Downside 3 189 322 363 378

Joint Proxy Statement/Prospectus filed with the SEC in May 2000.


24%
11359 12350 13585 14943.5
13961 15404 16549 18203.9
9269 9759 10868 11954.8
-20%
614 724 869 1043
1000 1167 1390 1668
403 407 408 490
60%
-53%
Exhibit 10 Market Interest Rates (March 2000)

Corporate Long-term Bonds Government Securities


AAA AA A BBB BB B 3 Month 6 Month 30 Year

7.01% 7.14% 7.31% 7.72% 9.18% 10.44% 5.88% 6.15% 5.84%

Source: Standard & Poor’s Datastream.


Exhibit 11 S&P Key Industrial Financial Ratios by Long-Term Debt Rating

Three-Year Medians—1997 to 1999


AAA AA A BBB BB B CCC

EBIT Interest Coverage 17.5x 10.8x 6.8x 3.9x 2.3x 1.0x 0.2x
Total Debt as % of Market Cap.A 0.037 0.092 0.164 0.304 0.475 0.593 0.743

Source: Standard & Poor’s Credit Week, September 2000.


aDefined as the ratio of Total Debt (long term and short term) to Total Market Capitalization (the sum of total debt, minority in
m of total debt, minority interest, preferred equity and year-end market value of equity).
CAPEX 7% 6% 5%
DEP 8% 8% 7% 7% 6%
Tax Rate 40% Growth 20%
Growth 10%
Year Ending June 30,
2000 2001 2002 2003 2004 2005
Base Case ($ million) 0 1 2 3 4 5
Cases 1
Revenues 6619 7417 8564 9504 10416 11359
12.06% 15.46% 10.98% 9.60% 9.05%
Gross Margin 1264 1409 1696 2043 2312 2624
EBITA 141 189 316 449 499 614
34.04% 67.20% 42.09% 11.14% 23.05%
Tax 56.4 75.6 126.4 179.6 199.6 245.6
EATBIA 84.6 113.4 189.6 269.4 299.4 368.4
Depreciation 593.36 685.12 665.28 729.12 681.54
Capital Expenditures 463.33 519.19 599.48 624.96 681.54
Working Capital 1720.94 1928.42 2226.64 2471.04 2708.16 2953.34
Change in Working Capital 207.48 298.22 244.4 237.12 245.18

FCFF 35.95 57.31 90.8 166.44 123.22

TV
Discounted Values 39.84262 70.3928411 123.604128 251.104143 206.028081

Value 7161.462
Outstanding Shares 227.2 14597.6

Price per Share 31.52052


NWC 26% Growth Rate 3%
5.50% 4% 4% WACC 9.77%

2006 2007 2008


6 7 8

12350 13585 14943.5 2176 180.67%


8.72% 10.00% 10.00%
3026
724 869 1043
17.92%
289.6 347.5 417.0
434.4 521.3 625.5
679.25 543.4 597.74
741 679.25 747.175
3211 3532.1 3885.31
257.66 321.1 353.21

114.99 64.33 122.9 $2,699.78

1869.68582
213.085712 132.116436 4255.601716