Seagate's initial public offering is expected to raise $1.08 billion, based on the high side of its $13 to $15 per-share pricing range. But the company could receive only $317 million of the proceeds--with the remainder largely going to the buyout companies that took the company private and to the management group.
And that ratio rubs one portfolio manager the wrong way.
"Fundamentally, Seagate is a good story. But the financial arrangements of the deal I find repellent," the manager said. "The buyout firms are making too much money on the deal...I don't see a lot of money going back to the company. The IPO doesn't do anything of significance for the company itself."
This particular fund manager also said that the "huge" number of potential shares to flood the market once Seagate's lock-up expires is also a concern. A lock-up period prevents company insiders from selling shares--typically for 180 days after the IPO. But once the lock-up expires and insiders sell portions of their holdings, downward pressure is often put on the share price. In Seagate's case, the number of shares that will be available after the lock-up expires is nearly five times the number that will be offered in the IPO.
"I won't touch this deal with a 10-foot pole," said the portfolio manager.
But another major portfolio manager said the tough market in which Seagate competes is more troubling than the potential effects of the financial arrangements of the deal.
"Seagate's management is credible and experienced, but I think they are operating in one of the most volatile segments of the tech industry," said the portfolio manager, who has not yet decided whether to invest in the offering.
The industry has been plagued by intense competition and slim profit margins. But Seagate's fundamentals are strong, portfolio managers note. Seagate is better positioned in the industry because it's independent and does not compete with its customers, unlike companies such as, said a portfolio manager.
And, the manager noted, because Seagate runs its own research and development for its drive heads and media, it is not dependant on third-party partners to keep up with the technology curve, which isn't the case for competitors such as Western Digital.
During the quarter ended Sept. 27, Seagate generated $1.58 billion in revenues, up from $1.29 billion a year ago. And the company's net income rose to $1.10 a share, compared with 34 cents in the year-ago period. But when accounting for the recent sale of its XIOtech, Seagate's pro forma results for the quarter showed revenues of $1.56 billion and net income of 29 cents.
Despite Seagate's ability to post a profit in the recent quarter while some of its rivals, such as Maxtor, lost money, one portfolio manager noted Seagate's valuation based on its IPO range is running high.
The company, which was takenin 2000, is expected to set a specific price for its shares Tuesday and begin trading Wednesday under the symbol STX.