How Can Seagate Technology Buyout Case Help You Perform Better in Business. There are many things that can go wrong in business operations, from sales to expansion. Running a business is not an easy task.
Numerous businesses experience hundreds of minor issues each year that turn into difficult-to-manage long-term problems.
In this case study, we will go through the term and process of “Buyout,”. Its different types, and what we can learn from Seagate’s Buyout Case Study Solution.
What is a Buyout, and what are its Types?
Before we get into the depths of this case, we must first understand what the term “buyout” means.
A “buyout” is a process of business finance that means an investment transaction in which a company’s own equity or the majority of its stock is purchased.
Thus, the target company’s current equity holders are “bought out” by the acquirer.
The buyer typically assumes the outstanding debt of the target company in buyouts.This is called “assumed debt.”
There are 2 different types of Buyouts:
Management buyouts (MBOs)
A management buyout (MBO) is a type of acquisition in which an organization’s corporate managers buy a large part or all of the company from a parent company or a non-artificial person (s).
MBOs are also a way out for big companies that want to sell off parts of their business that are not their main focus or for small businesses whose owners want to retire.
Leveraged buyouts (LBO)
A leveraged buyout is when one company buys out another using a large amount of money borrowed (leverage) to pay for the purchase.
An LBO involves borrowing a lot of money. And the assets of the business being bought are often used as security for the loans.
Leveraged buyouts make logical sense for companies that want to buy big companies. But do not want to spend a lot of money.
Let’s get into the Seagate Buyout Case: Buyout Analysis and Result.
Now that we know what “buyout” actually means and what its types are. We can now go deeper into the buyout case of Seagate.
Seagate, founded in 1979, was one of the biggest companies in the world that made computer disk drives and other data storage devices and systems.
At the time, it had approximately $6.5 billion in total annual revenues.
In March 2000, an investor group led by Silver Lake Partners, Seagate executives, and the Texas Pacific Group purchased Seagate Technology in a complex $19-20 billion deal with the help of an LBO.
The important thing to note in terms of leveraged buyouts is that it is a high-reward. But high-risk strategy in which the acquisition must bring in high returns and cash flows to cover the interest on the debt.
LBOs often create value because there is a lot of cheap credit available. The PE firm is good at engineering, and the interests of shareholders and management are better aligned.
Empirical evidence suggests that price and Earnings per Share increases from alternatives like stock buybacks are only short-term because the increase cannot be attributed to organic growth.
”Up until the speculation in the past 30 days, the stock traded at a huge discount to the underlying assets,” Steve Luczo, Seagate’s president and chief executive, said in a telephone interview.
The disk drive business is “probably the most disliked in technology by public investors.”
“As a result, you have a kind of pressure that is short-term in nature.”
We now align ourselves with an investor group that has a long-term perspective and a belief in the importance of storage devices.’
This statement by the CEO himself clearly means that he understands that the public investor is not very keen on the disk drive and data storage systems industry and ignores its value.
Thus, by executing an LBO, they can easily go private and perform way better in the hands of the private investor group that has taken over Seagate.
In a technological market that is undervalued, an LBO values Seagate Technology at its fair market value.
Seagate Technologies will get more value and make more money. Because of Silver Lake’s tech reputation and expertise.
Selling Seagate completely would mean missing out on its high-growth possibilities in data storage and consumer electronics while having to pay high taxes on the sale.
The disk drive industry has a short product cycle, few consumers, and is driven heavily by R&D.
These factors make cash flow uncertainty in the industry worse and make PE firms less likely to invest in the industry.
Seagate’s aim is to enter network data storage and high-margin industries to improve its cash flow prospects.
Its “vertical integration” strategy would help it deal with changes in customer demand better than its competitors.
Seagate’s ability to stay as the market leader depends on being able to pay for higher fixed costs like research and development (R&D) costs and expansion capital.
Cheaper financing from an LBO and more cash flow in the future is expected to help Seagate pay for these costs.
Also, by selling to Silver Lake, Seagate gives its stockholders a fair price for the stock on the market.
If you are a business that has management, market value, investment, and cash flow issues, then taking some tips from the decisions of the Seagate management can help your case if it is similar.
Fisher, Lawrence M. 2000. “Seagate to Be Taken Private in an Intricate Buyout,” (Published 2000).” The New York Times.
Businesses all over the world have to deal with a wide range of internal and external problems that require them to take certain steps to get better.
There are many things that can go wrong in business operations, from sales to expansion. Running a business is not an easy task.
In this case study, we discussed the term “buyout,” its types, and how its process is executed.
Then we analyzed the buyout decision made by Seagate and the issues that led to an LBO.
Some solutions take time and have unfavorable side effects in the short term, but they are effective in the long run.
Other solutions might offer quick fixes to particular issues.