How can something so important be worth so little?
Although the bid for Seagate Technology (NYSE: SEG) privacy commands a total value of almost $19 billion based on this morning's prices and certain cash assumptions, the deal only values the actual company at $2 billion. The bulk of the deal's worth comes from stock, in a bizarre transaction that has Veritas Software (Nasdaq: VRTS) trading 109.8 million shares for Seagate's entire stake of 128 million VRTS securities.
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I wish I could give someone 85 cents and get back $1 in return. No wonder Veritas is defying today's downward Nasdaq trend.
Probably it was the only way Seagate could get any kind of premium for its shareholders. And it shows just how badly Seagate management wanted to get Wall Street off its case.
Seagate CEO Stephen Luczo and his management team want relief from stock market pressures: "By taking Seagate private we will be able to pursue investments in our core operating business with financial partners who have a long-term perspective, and a thorough understanding of the challenges of the disk drive industry."
Meaning the stock market doesn't have those qualities.
He's right, of course. Seagate is the biggest company in probably the most vital computer-related industries outside of processors, OS software and memory chips. It's an industry that's efficient to almost unreal levels: between 1988 and 1998, average disk drive prices per megabyte fell 99.8 percent, according to figures from Desk/Trend.
Yet its revenue remains constrained by a cheap industry, which makes it almost impossible to deliver the kind of high growth tech investors demand.
Some Seagate shareholders may feel cheated, which could be the stock has fallen all day after opening at 75 and trading higher last night. After all, $2 billion cash basically means management and its private partners are paying scarcely eight times next year's estimated earnings.
But once you factor in those VRTS shares, will anyone pay more for Seagate? Who in their right mind would buy a disk drive maker? That Veritas stock has turned out to be Midas gold: it makes Seagate valuable, but it's so expensive that no one can afford to pick up Seagate.
And let's face it, it's not like revenues are suddenly going to skyrocket. This is a high unit, slow revenue growth industry these days.
Seagate is a victim of its own operational success, to some extent. The company and industry as a whole became so good at manufacturing disk drives cheaply that supply became bloated a few years ago, competitors waged war on prices, just a handful of companies survived and not even the survivors ever fully recovered.
Shares of Western Digital (NYSE: WDC) and Maxtor (Nasdaq: MXTR) remain below peak levels. Quantum, desperate to unhitch its tape drive and storage systems business from the maligned hard drive unit, switched to a pair of tracking stocks, DSS and HDD.
Quantum HDD shares are up this year, as are some hard drive related stocks on sentiment that the field is on an upswing. But it will always be a cyclical field, and even now, keep in mind that Seagate's shares basically rose on the Veritas holdings. Once the cycle hits the downward curve, things will look poor again.
On the other hand, by going private while it's in a position of relative strength, Quantum can spend now to prepare for the future.
"What we'll be able to do is increase investments in those areas in order to accelerate the deployment of those technologes and again not pay the penalty of '(Did) the Street like what that did to some quarter's P&L?' " Luczo said.
Ultimately, I wonder if all tech manufacturing stocks won't face the same choices as Seagate. For even the best manufacturers around, eventually hardware becomes so common that it's viewed as cheap and low margin.
(Ok, not mainframes and maybe not high-end servers and routers. But everything that lands in the mass market has to be commoditized, by definition.)
Already, PC makers are trying to deal with it by branching into related areas, like servers, high-end storage and business services. Intel (Nasdaq: INTC) is stalking the communications chip arena. 3Com (Nasdaq: COMS) seeks salvation in cutting edge modems.
But those venues probably won't take too long before leveling in growth, maybe within a decade (probably less in 3Com's case), especially at today's accelerated pace. Ten years may sound like awhile, but think about it: was 1990 really that long ago?
And then how do you satisfy Wall Street's craving for high growth? Maybe going private isn't such a bad move.
Not that it's likely to happen; but it might be the only thing that makes sense in the long run. 22GO>