Study On The Seagate Technology Buyout Finance Essay

Study On The Seagate Technology Buyout Finance Essay Motivation and structure of the transaction. In early 1999, Seagate was planning on major restructuring proposal with the private equity firm, Silver Lake partners L.P. The plan implied a leveraged buyout of Seagates disk drive operations, followed by the tax free acquisition of Seagates remaining assets by VERITAS Software Corporation. The choice for this two step transaction was mainly a result of Seagates 40 percent ownership of VERITASs common stock. In the previous year the share price of VERITAS increased significantly and the market value of Seagates share in VERITAS had come to substantially exceed Seagates entire market capitalization. The value gap was a result of the perceived tax liability by the market if Seagate were to sell its VERITAS stake and Seagates core disk drive operations were not fully valued in the market due to increased interest in Internet firms and cheaper data storage providers. The two-step transaction was thus believed by Seagates management to genera te significant wealth gains for its shareholders. Before making their decision Seagates has to consider some alternatives to the previously described restructuring in order to address its low stock price. The company could sell the company as a whole, repurchase its own stock or sell off part of the VERITAS stake, or undertake a tax-free spin-off of either the disk drive business or its stake in VERITAS. We address each of these alternatives next. Seagate could choose to sell itself to other companies that may be interested. A merger or acquisition, in this case, could be either horizontal or vertical. Whereas a horizontal merger or acquisition could be beneficial for Seagate, because of the even higher market in the very competitive disk drive market, a vertical merger would be less successful as the company is already vertically integrated. However, it would be ideal for Seagate to be acquired by VERITAS as it holds 40 percent of its shares. But VERITAS was not interested in entering into the disk drive industry as management believed this was to far away from their core software business. A second alternative for the company is to sell its VERITAS stock or repurchase its own stock partially in the open market, however. However both actions proved to be ineffective. First Seagates ability to sell of VERITAS shares was limited by a prior agreement made with VERITAS. Even if they could sell off the entire VERITAS stake, it still seems an undesirable outcome since the transactions would be taxable on both the corporate as personal accounts. Second when the company performed a repurchase it had little impact on its stock price. A tax free spin-off would imply that Seagate spins off one of its business units, the core disk drive business or the VERITAS stake as an entirely new company. However the internal revenue code, as part of the US statuary tax law, requires that both the distributing corporation and the controlled corporation must be engaged immediately after the distribution in an actively conducted trade or business for a five-year period. Furthermore it also states that the corporate divisions lacking a business purpose can not be accomplished tax free (IRS, 2003). Clearly the VERITAS stake corporation will not satisfy these conditions and thus a tax free spin-off is unlikely. Besides the distribution must be the last resort for solving the business problem. In other words, it must be established that the business problem cannot be solved otherwise. This condition also does not hold since, as we will later see, the proposed two step transaction remains as a valid alternative. After reviewing these alternatives the proposed two step transaction seems to be baneful, mostly due to its low tax nature. As indicated in the case the stock-for-stock swap qualifies as a reorganization under the Internal Revenue Code, thus avoiding the tax implications as a swap. VERITAS will swap 109,330,300 shares for 128,059,966 shares previously owned by Seagate, and the tax advantage will be Huge as no personal or corporate taxes have to be paid on the transaction. Furthermore the decrease in total outstanding shares associated with the deal will cause earnings per share to rise, cetris paribus. In total this would be in the benefits of the VERITAS shareholders, enabling the two stage transaction to be pursued on their behalf. Seagates shareholders also benefit from the potential restructuring program. First they will receive 109,330,300 shares that have experienced a price increase of 200 percent after the half year that followed VERITAS acquisition of Seagates Network and Storage group. Compared to the 25 percent increase over the same period of its own shares this is a significant difference. Furthermore they will receive an additional amount generated from the sale of Seagates disk drive manufacturing assets (including $765m of cash) to the Suez Acquisition Company. The benefits to be received here, and thus also the potential benefits of Silver lake Partners L.P. are thus for the main part determined by this price, which was not determined yet. Seagates employees will also benefit from the two step transaction as their incentive to perform increases significantly when the new Suez Acquisition Company is no longer tight to VERITAS performance. Corporate governance is now considerable tighter than in th e old situation. A sincere loser of the reorganization is the government that could have gained more in taxes if one of the pre-described alternatives were chosen. Levering the buyout There are a number of benefits of leveraged buy outs. Business efficiency improvements, increased interest tax shields, change of management or improved management incentives and higher firm value are the most important possible effects. In the case Seagate an increase of the stock price was the most important target of the leveraged buyout. Before the leverage buyout Seagates stock price was more and more tied to VERITAS stock price. The performance of Seagates main business was a subordinated parameter. The trial to increase the stock price by means of selling VERITAS shares and buy own shares in the open market did not lead to the aimed target. Therefore a leveraged buyout was a possibility to lose the stock price from the performance of VERITAS. Besides of this main purpose to disconnect the stock price development from VERITAS also other positive effects of leveraged buyout could be realized, as the improvement of the market position of Seagate from a strategic and long-term point of view. As a consequence a higher probability to secure a positive stock price development after being on the stock market again can be attained. Another positive aspect of leveraged buyouts are taxes that can be saved through higher debts and interest that is tax-deductible. Although it should be considered that interest cannot be deducted unlimited because of interest barrier rules or earnings stripping rules. Therefore the interest only can be deducted to a certain extent, depending on the debt-to-equity ratio. There are specific regulations that differ from country to country. In case of cross-border leveraged buyouts the situation should be analyzed separately. Within the EU there is no different treatment in cross-border situations because of the freedom of establishment and the freedom of capital of the EC Treaty. A decisive argument of leveraged buyouts is the possibility that enterprises that were poorly managed before their acquisition can undergo valuable corporate reformation when they become private. An important change in the corporate structure is often the modification and replacement of the management staff or improved management incentives. In the Seagate case Silver Lake was convinced about the abilities of the management team. Silver Lake argued that the members of the management team had over ten years of experience in the disk drive industry and underlined that it was an important condition of the deal that the six top managers were taken over. In many articles it is argued differently as a restructuring without modification of management staff is much harder and there is a stronger opposition against many unpleasant but necessary changes. As incentives the management had to convert a portion of their Seagate equity into new equity and also got some deferred compensation. The re jection of unnecessary company sectors as well as the reduction of excessive expenditures also is an important factor for the success of the deal. In the leveraged buyout market stable and predictable cash flows and significant tangible assets which can be provided as security for bank loans are positive preconditions. These are features that make an enterprise for private equity firms interesting to invest. In the 1980s and early 1990s industrial companies were strongly favored and technology business was avoided. This has changed as the technology sector has become more and more important and in the last years this sector has become increasingly more interesting for Private Equity investments (von Nell-Breuning/2010). The disk drive industry as part of the technology sector is distanced by heavy price competition, short product life cycles which are often no longer than six months and high expenditures on RD. These are features that make buyouts very risky. It makes it difficult to predict cash flows, which plays a significant role for the success of a leveraged buyout. Nevertheless Silver Lake was convinced that in general the disk drive industry market development would be extremely positive and that the disk drives would be the key technological component in hardware products. It also should be taken into account that Seagate had a number of characteristics that were from a positive nature for a leveraged buyout like vertical integration for a better competitive position on the market. But also high RD while using up cash is a positive aspect to prevent market entry of smaller, less well-capitalized competitors. Another advantage of Seagate was the relatively high equity ratio compared with the technological industry. The equity ratio of Seagate was 26.6 per cent in June 1997, it was 29.6 per cent in June 1998 and in June 1999 the equity ratio constituted 23.9 per cent. The equity ratio of its competitors were lower, f.ex. the competitor Quantum HDD only had an equity ratio from about 13.5 per cent. The average equity ratio of mature industries is between 20 and 25 per cent depending on the country. Capital Structure In order to assess the capital structure of the deal and in essence the amount of debt the Luczo and the buyout team should take it is necessary to estimate the firm value. Two model are being considered for this task. The first one is the relative valuation model. The rationale for relative valuation stems from the notion that the intrinsic value of an asset is difficult to estimate. Its value can be measured by the price the market is willing to pay for its assets, based upon its characteristics. The second model being considered is the DCF model. When comparing relative valuation with DCF, one advantage over DCF is the reflection of market perceptions on the value of the company. Thus, in a perfect market, the perceptions of future prospects are already reflected in the stock price. It requires less information than DCF models and is therefore less prone to estimation errors. In addition, managers are often judged on a relative basis and relative valuation might therefore match th eir needs and horizons. Markets are assumed to make mistakes when pricing assets across time. DCF valuations detach themselves from market valuations and assess the fundamentals underlying the firm and its growth perspectives. Relative valuation leads to a reasonable estimate when there are many comparable assets that are priced in the market and a common variable can be applied to standardize the prices. Although the case offers some information on competitors we deem the data to be insufficient. Even more, relative valuation works best for investors that usually have relatively short investment horizons as it is rather difficult or impossible for the market to perceive long-term growth perspectives. In general a private equity investment(PE) spans on a 5 to 7 years time line meaning the PE investor has a medium to long-term investment horizon. More confidence in reasonable firm value estimation is thus assigned to the DCF valuation. The fundamentals of a company provide a prudent basis for estimations. Assumptions for the estimations are transparent while these are rather not in the case of relative valuation. A DCF valuation can be applied to long-time horizons and is thus more applicable for investors with long-term investment perspectives. In addition, a fundamental approach might work as a catalyst that moves the price in the market towards the real value of the assets. Silver Lake Partners L.P., as the bidder for the controlling stake of the company is interested in deriving the firm value, meaning the value of the equity stake in association with debt. Cash flows coming from operating activities would therefore need to be estimated. A first step concludes in the calculation of free cash flows to firm (FCFF). The FCFF is computed based on the following assumption: The company management provides three different projections for the buyout team: The Base Case, The Upside case and The Downside Case, each differing in EBITA and Revenues values. Capital expenditures and Depreciation are to remain the same in all three cases. The values used are provided in the operating performance projections table of Seagate. The working capital(WC) is mentioned in the case as being historically equal to 0 for the industry so the change in WC is to be ignored. According to this values the FCFF can be computed. After total cash flow is calculated, it is brought back to NPV using the companys weighted average cost of capital (WACC). The WACC, which is defined by the relative cost of the companys debt and equity is also viewed as the required rate of return for the company and its investors to compensate them for the inherent risks of ownership and realization risk for projected cash flows. The value for the risk free rate and the market risk premium have been set as given by Damodaran(2010) as 3.20% and 2.05% respectively. The beta of the company is supplied by the case as 1.2. Thus we come to the value of 6% for the WACC. Based on the values of the FCFF and WACC computed we can now asses the present value of the firm in the years to come. By summing up this values for the required time horizon we get to the firm values for the three cases Figure 1 Firm value analysis As it can be noticed the firm values for the cases register important differences. The Upside case stands out. Comparable to this the Downside Case has a much smaller difference. In order to better account for the possibility of worse than expected, but more importantly, for better than expected performance in the company we consider that the average of the three values should be used as the firm value and as the price the buyout team should pay meaning US$2.224 billion. We have determined a purchase price of $2.22 billion that Silver Lake Partners will pay to acquire the operations of Seagate. This will be a leveraged buyout that includes two different equity sources and two different debt sources. Our proposed capital structure will consist of 79% percent equity and 21% percent debt. This structure was chosen based on the BBB three-year median rates as referenced in the case (Exhibit 11). The EBIT Interest Coverage ratio set the median value over 1997 to 1999 of 3.9x. In order to get the highest value for the firm when deciding to sell it, the PE firm will try to maintain its rating or even to improve it so it makes sense to consider the BBB value as appropriate. Even more lower rating will also mean higher interest rates for its debt. Using this value and the EBIT values provided for the case we can compute the amount of interest that the firm can afford to pay every year. It can be noticed in Exhibit 1 that the lowest value for EBIT is predicted in year 2000 so it makes sense to consider this value as a benchmark as the following years the performance is expected to improve. Starting from amount of interest that the firm can afford to pay every year we calculated the value of debt that the firm has to take in order to be required to pay that amount of interest. This adds up to US$468.31 meaning 21% of the price recommended for the deal. By comparing this result with the values provided in Exhibit 11 from the case it can be noticed that the firm will remain under BBB rating. The remaining 79% is to be provided by the buyout team in form of equity. It should also be considered that Silver Lake Partners L.P. will receive US$765 million by acquiring Seagate, funds that can be used as equity for the deal. Figure 2 level of debt analysis In order to better assess the impact of the three scenarios on the capital structure of the deal we also used the values computed under The Base Case, The Upside Case and The Downside Case. Again it can be noticed that the better performance predictions stand out. This is based on the possibility that in the latter years of the investment the firm will perform over the expectations even though 2000 is perceived as the same in all cases.

How Do Trend in the Marketing Industry

1. How do trend in the marketing industry, such as integrated marketing, affect advertising? Nowadays, there are too many trends in the marketing industry which we can see all over the places. These trends do not only give implication to the industry itself, it also affects the advertising field as well. Internet Marketing is an all-inclusive term for marketing products and/or services online – and like many all-inclusive terms, Internet marketing means different things to different people. Essentially, though, Internet marketing refers to the strategies that are used to market a product or service online, marketing strategies that include search engine optimization and search engine submission, copywriting that encourages site visitors to take action, web site design strategies, online promotions, reciprocal linking, and email marketing – and that’s just hitting the highlights. This is one of the trends in the marketing industry. These trends affect the advertising field by allowing them to promote a product or services widely through the internet. Many firms are embracing a paradigm that is shifting the focus of advertising methodology from traditional text and image to the JavaScript and Adobe Flash, which is known as the online advertising. The potential customer can access information concerning the service or product to help in deciding the need or use of products through online. Another that are often used by the marketers is applying local cultures in a global product. In this trend they usually brings in a global product into a country and applies a local culture to it, such as the country’s national language, costumes, local celebrities and much more just to attract their local customer to buy the product. Understanding a country’s culture is a key to global success. Food, food retail, beverages, household cleaning and personal care products are highly subject to the influence of culture because they are rooted in local taste, traditions, and needs. While it is very difficult for marketers to overcome these differences, there is no real imperative to do so. It doesn't matter if a food brand has different incarnations in different countries; the vast majority of consumers will be completely oblivious. For an instance, Coke has taken in adapting both its product and its communication. As a standard practice, Coca-Cola modifies its product to meet local tastes and invests heavily in locally inspired communication to complement its global positioning. The longer a brand has been in market, the more likely people are to have grown up with it and accept it as part of the local scene. This trend in marketing industry gives more implication to the advertising field. Firstly, for this kind of trend, global companies have to come up with more advertisements just for one product. Because, they are selling their products all over the world, which to be said in different countries. Whenever they adopt a local culture in selling their product, advertising plays an important role by showing the criteria of local culture to the audience, such as using the local language, local celebrity, local customs, and etc. For an example, in the Pizza Hut advertisement in Malaysia, they use the local language, such as â€Å"sensasi† and the tag â€Å"halal† in their advertising strategy just attracts the local consumers. In conclusion, advertising field is always getting affected if there are any changes or new trends in the marketing industry. This is because, advertising is the tool that helps the audience to get information about a product or services and also it attracts them to purchase it. 2. Can advertising be a factor in relationship marketing? In what way? Discuss. Advertising plays an important role in relationship marketing. Advertising is a form of communication intended to persuade an audience (viewers, readers or listeners) to purchase or take some action upon products, ideas, or services. Relationship Marketing were defined first as a form of marketing that developed from a direct response marketing campaigns which emphasize the customer retention and satisfaction, rather than a dominant focus on sales transactions. In others words, it recognizes the long term value of customer relationships and extends communication beyond intrusive advertising. And also, Relationship marketing attempts to involve and integrate customers, suppliers and other infrastructural partners into a firm's developmental and marketing activities. In the most basic sense, advertising can help in promoting the sale of a particular product or service. Advertising in the olden times, was just spreading simply through word of mouth. It was to promote the sale of a product, good or service. As time advanced through the 17th Century, advertisements began to appear in newspapers, and later, in other forms of mass media, such as radio, television and cinema. Moreover, advertising in recent years, has maneuvered its way through the other forms of advertising, such as advertisements being displayed on fruit products, ads being displayed on vehicles such as buses and taxies, and even in public and social places, like the shopping malls and streets. Besides that, advertising in the recent years has been escalated through the airing of TV commercials, and the phenomenon of the World Wide Web, or simply the Internet. Banner ads and newsletters have been included in company websites, to encourage the number of customers logging on to a particular website. Advertisements have been helping to motivate the demand for particular goods and services. Advertising through the implementation, and setting up of billboards on the sides of streets and major shopping areas, is yet another growing tactic among marketing professionals, and advertising agencies. This has skyrocketed the product sales. Through this advertising, the images of particular products and services have enhanced, and resulted in a significant increase of sales over the recent years. In conclusion, advertising has created a sense of public awareness among the people about the products they use in their daily routine. On the other hand it is yet another means thorough getting a message across to a wider audience of people about a particular product. Advertising through television and billboards ensures that the sale of a particular product or service is amplified. Looking at it from a different perspective, advertising could be considered as an effective marketing strategy towards increasing the publicity of a product and in turn reaching out to a wider customer audience. Thus, it is an important factor of relationship marketing.

Psych Unit IV Article Review Essay

There are so many different theories out there that try to explain why we act the way we act. How do we explain evil or hateful behavior? I just finished reading the article ‘’Prison Violence: Does brutality come with a badge?’’, written by: Bruce Gross. This article talks about being a prison guard, and how some people act when they enter this career. Would you act differently if you went from the role of the prisoner to the role of the prison guard? There have been many reports of ‘’cruel and unusual’’ punishment that is being administered by prison guards to inmates in prisons. Not only are inmates reporting this abuse, but federal authorities are also recognizing there is a problem. In 2005, the commission on Safety and Abuse in Prisons said there were 16,000 allegations of sexual and physical assault that were reported. There are also reports of abuse happening in County jails as well as in prisons. ‘’Inmates have reported being choked, kicked, punched, and hit with objects by single or multiple guards’’, (Gross, 2008). If you look back at our history, it is full of ordinary people who commit terrible acts of violence. Some people have done studies and are trying to understand why people commit these ‘’evil crimes’’. Stanley Milgram is one of those people. He was a Yale University professor, who conducted an experiment in 1961. In this experiment there were ‘’teachers’’ and there were ‘’learners. The teachers were given the power to administer a shock to the learners if they answered a question wrong. It was surprising how much the ‘’teachers’’ in the experiment would shock the ‘’learners’’ and the amount of volts that they would use without protest. Another experiment that was done to test these violent behaviors was known as the Stanford Prison Experiment. In August of 1971, this experiment was started by psychology professor Philip Zimbardo. He put an ad in the paper and found volunteers to play role of ‘’prisoner’’ and the role of ‘’guard’’. He created a prison-like environment in the basement of the psychology building on the Stanford Campus. There was some definite brutality that started to show in the guards during this experiment. Some showed more than others. After only 6 days, the experiment was shut down. One third (1/3) of these ‘’guards’’ showed sadistic behavior. There was a similar study done that was called the BBC Prison Study. This study was also shut down early. ‘’Both of these prison studies demonstrated that under some circumstances, some individuals resist going-with-the flow of group associated brutality’’, (Gross, 2008). Sometimes an individual will behave differently if they know they’re being watched. In the SPE experiment, the participants knew they were being watched by ‘’supervisors’’, and on the BBC experiment, they knew they were being watched by an audience (including family and friends). These factors may have affected the way that either group acted throughout the experiment. I know I would act differently if I knew that my mother was watching me. Some people think it’s the environment that people are in that brings out violence. Well of course it is! If you treat someone like a caged animal, eventually they will start acting like one. If a guard is told to dehumanize a prisoner, then you will probably see violence out of the guards, as well as out of the prisoners. ‘’Violence and extreme behaviors by guards against inmates have many sources’’, (Gross, 2008). In the prison studies that were covered in this article, it didn’t surprise the experimenters that ‘’good people’’ were committing evil acts when they played the role of the guards. They were more surprised and shocked that more people didn’t stand up for what was right. Even if they didn’t agree with what was happening, they just kept their mouth shut, and went with the flow. At the end of the article, Gross says, ‘’Perhaps the adage is true, that real evil exists and flourishe s when good people do nothing’’.

The Feminist Theory Of Fargo By The Coen Brothers

Scrolling through Netflix trying to pick a movie, viewers can generally get the idea of the movie based on the title shown. The first thought that popped into my head after reading the title ‘Fargo’, was how far would an individual strive to achieve and/or accomplish a goal or mission and how far would that individual run if caught in a unforeseen circumstance. The 1996 film ‘Fargo’ by the Coen Brothers, explores a handful of themes such as, life, death and evil. The idea of the movie is that the main character Jerry Lundegaard is a car sales man and is not very good at his job. He is shown no respect from his wife and child and his boss, which is also his father-in-law. The film takes place in a small town in Minnesota. This essay will explore the Feminist and Marxist theory, seen through this film ‘Fargo’ and its characters. The Feminist theory and Marxist theory are mainly seen through the characters Marge, the police officer and Jerry the m ain character, which the entire movie revolves around. In the Coen Brother’s 1996 film ‘Fargo’, Jerry is a pathetic car salesman who is financially unstable, plans to have his wife kidnapped so he can cash in on some money. A business deal about to go sour Jerry, hires two goons for the kidnapping. Along with Jerry being very nervous and jumpy all the time, no one has any idea why or what, Jerry needs the money for. With Jerry’s father-in-law being a successful businessman and owner of the car dealership, which Jerry is an employed