The deal, which will lead to Seagate becoming a private company again, is the latest turn of events for one of Silicon Valley's oldest citizens. Founded by Al Shugart at the dawn of the computer revolution, Seagate helped define the hard drive business. (See related story.)
Slim margins and intense competition, however, have decimated profits in recent years for both Seagate and its competitors. Hard drive companies have routinely reported quarterly losses for the past several years.
At the close of regular trading today, Seagate shares were down $5.44 at $62.75. Veritas shares fell $12.44 to $142.50. The transaction was announced after the markets closed. In after-hours trading, Seagate quickly rose to $74.75.
Seagate's hard drive business in many ways is the orphan in the transaction. Under the terms of the deal, Veritas, a storage management software provider, will acquire all of the Veritas shares currently held by Seagate as well as certain other assets, including Seagate's shares in SanDisk, Gadzoox and CVC, all specialists in various niches of the storage market. Seagate currently owns 128 million shares, or 33 percent, of Veritas.
Simultaneously, Seagate's hard drive business will be acquired by a group of investors led by Silver Lake Partners, an investment group that includes venture capitalists Kleiner Perkins Caufield & Byers, Jim Davidson and Roger McNamee, among others. Seagate will then become a private concern for the immediate future. The Texas Pacific Group is also an investor.
The investment group will pay approximately $2 billion in stock and cash for the assets of the hard drive business. The Silver Lake investors group originated and led the transaction, according to the companies.
Seagate investors, meanwhile, will receive consideration amounting to $77.50 per share of Seagate stock. Payment will come in the form of slightly less than a half a share of Veritas stock and $5 cash for each share of Seagate.
Seagate has traded as low as $25.12 in the past 52 weeks. At the beginning of the month, it was selling for under $50, although it has been climbing.
Although the companies have valued the deal at $20 billion, the actual price depends on the closing stock price and other variables.
There were no other bidders for the hard drive business, acknowledged Seagate CEO Steve Luczo during a conference call. Lawrence Perlman, co-chairman of Seagate, said the company and its investment partners did try to attract other buyers for the hard disk business, however.
"This was the only deal that emerged," Perlman said. He added that there "was not a lot of enthusiasm for owning the disk drive business" on the part of Veritas.
Luczo said the motivation for the transaction came up because the value of Seagate's underlying business was undervalued by the market.
"The stock value as determined by the market was trading at a substantial discount," he said. "This is the result of a lot of work by the board in determining how to best unlock the value of Seagate stock."
"We believe the operating company will be stronger in the current environment as a private company," Luczo said, hailing ownership by "financial partners who have a longer-term view."
Silver Lake founder McNamee said the transition to private ownership would allow Seagate to more aggressively pursue strategic plans during a time of rapid change for the storage industry.
"We believe in the strategic nature of data storage in the Internet economy," he said.
Veritas CEO Mark Leslie said the deal would benefit the company, which will become part of the Standard & Poor's 500 index this week, by decreasing the firm's stock float enough to boost earnings per share. Given the heady pace of mergers and acquisitions in the tech industry, it's also good insurance. "We keep the Veritas shares that Seagate holds out of unfriendly hands."
"I think both organizations benefit from this transaction," said International Data Corp. analyst Robert Gray.
"This is a smart use of Veritas' market capitalization," he said. Making Seagate private again will allow it to worry about strategic issues rather than quarterly earnings pressures imposed by being a publicly traded company. "To have to perform quarter-to-quarter is not a constructive business concept in general."
Luczo said the complicated nature of the transaction was necessary to guard shareholders from tax liability.
News.com's Stephen Shankland contributed to this story.