History 2003: Seagate IPO, All for Financiers

World HDD leader Seagate Technology became a privately-held company on November 22, 2000, after concluding a complicated deal involving Veritas Software and Suez Acquisition, the latter created by a group of private equity firms led by Silver Lake Partners specifically to acquire the company.

At the time, Seagate’s management made no secret of the fact that the ultimate goal of this privatization was an eventual IPO. That time has come. Seagate is re-entering the NY Stock Exchange under the STX symbol, raising $870 million in an IPO on December 10, by selling 72.5 million shares, or 17.5% of the company, at $12 each.

Was this a success or a failure? It all depends on your perspective and who you are. From $15 down to $10 The offering price was supposed to range between $13 and $15, before finally falling to $12, below expectations. At the close of trading, Seagate was off 50 cents at $11.50. Subsequently, in mid January, shares fell to a low of $9.86. With its $870 million price tag, this IPO was nevertheless in the top half dozen or so for 2002, in all industries, and by the far the greatest for a technology company, with the total sum representing nearly the total of all other tech IPOs of the year combined.

As a transaction, the IPO primarily benefits the investors, which include the company, although the latter will take little, since the lion’s share of the $870 million goes straight into the pockets of Seagate’s investors and upper management, and not towards development of the company. Out of the 72.5 million shares offered in the IPO, receipts from 48.5 million of them will go directly to those who acquired Seagate in 2000, the leveraged buy-out (LBO) investors led by Silver Lake Partners, and including Texas Pacific Group, J.P. Morgan Partners and August Capital. Of the 24 million remaining shares, a large part will go to deferred compensation for management, COB and CEO Steve Luczo and a hundred or so other senior employees. And this doesn’t even begin to take into account, for example the $36.5 million that Luczo received in deferred compensation in FY01. At least one person who isn’t worried about his pension …

Who would dare? Who indeed would dare an IPO in the current climate, with a depressed stock market particularly wary of tech companies, more so those involved in hardware? In addition, HDDs have a historically bad image, given their slim margins due to fierce competition between the major players, prices continually dropping, products with a very short lifespan and expensive R&D. The fact that the number of players is also down has scarcely improved the situation. Recall that IBM just bowed out, weary of losing so much money.

Who also would dare to go public with a company incorporated in the Cayman Islands for legal and tax purposes (even it operates in California)? This is viewed dimly by stockholders who have never been more distrusting about the shape of corporate books, even when the companies are 100% American.

Other points more specific to Seagate may also play vs. its favor. Currently, it enjoys tax advantages for its Asian factories that are not likely to last, and recently it was cited for health and safety violations in its China plant, as was the case in Thailand in 1991.

The time period chosen for the IPO also seems less than ideal, yet wasn’t selected at random: it comes after one of the company’s best financial quarters in many a moon, along with the previous quarter, with sales of $1.58 billion up nearly 22%, and a net profit of $110 million. One might almost forget that for its last completed fiscal year, ended in June, sales were down overall by 5%to $6.1 billion, and the lowest sales posted by the company since 1995.

To make the package more attractive, the company shed itself of SAN subsidiary Xiotech, long in the red, before launching the operation.

On the basis of $12 per share of Seagate, with a total of 426.5 million outstanding shares, we arrive at a market value for the company of $5 billion, for $6 billion in revenues, or a value close to its one time annual sales. This is a much greater ratio than that of Maxtor (60%) or Western Digital (25%), its main competitors.

This market value is also 3x greater than it was in 2000, when the company went private. Recall that at the time, the LBO investors paid about $1.7 billion for the company. In fact, the deal amounted closer to $1 billion, since the HDD maker had nearly $800 million in cash, something that caused an outcry on the part of certain shareholders, who felt they were robbed by the investors.

So, not only did the investors clear a hefty capital gains, but they also retain tight majority control of the company, with more than 80% of the stock in their possession, since they have only sold 72.5 million share out of the 426.5 million. All this boils down to an excellent return, to avoid unkinder words, obtained by the leaders of the privatization, on shares acquired for under $2 and sold for more than six times that. None of this prevented the transaction from concluding more or less favorably.

But it nevertheless leaves a slightly bitter after taste, and does nothing to improve the image of the HDD maker, which resembles more and more, unlike rivals Maxtor and WD, a firm managed by financiers rather than entrepreneurs.

The company’s ethics seem slightly elastic, and it has recently acquired the bad habit of mangling its figures to make them appear more attractive. Frankly, we personally would not have put a dime into the deal, if we didn’t already abstain from investing our savings into storage companies.

Writing about the IPO, The Motley Fool, who claims its mission is “to educate, enrich and amuse individual investors,” chose a delightfully malicious title: “4 reasons Seagate sinks.”

J.-J. M.

This article is an abstract of news published on issue 180 on January 2003 from the former paper version of Computer Data Storage Newsletter.