Upon analysis of the Seagate Technologies case, the arbitrage opportunity exists in the fact that Seagate’s stock price is undervalued. An investor would purchase the Seagate stock, sell on the market at the fair value, and collect profit. As this arbitrage opportunity is recognized, other investors (or MBA students) would also purchase Seagate stock (regardless of the fact that they invest in Seagate with their own capital or borrowed from the bank, since these is an arbitrage opportunity, there will be profit realized) , the price of the stock would eventually rise to fair value, eliminating the arbitrage opportunity.
The reason Seagate stock was undervalued was due to lack of investor interest. Seagate was perceived as a riskier company by the investors. Market analyst did not show interest in disk drives because it ...view middle of the document...
This would be an issue to Seagate’s management as employee moral would be low.
Veritas was the winner for getting 5% of Seagate stock for no cash as part of the stock swap deal. It will get 128 million of its shares in the deal in exchange for 109 million shares. Another benefit of the deal to the Seagate shareholders is a massive tax liability. The main loser of the LBO would be the federal government as there was no tax revenue recognized (the tax rate being 35% would result in significant revenues for the government). Silver Lake benefits from having the opportunity to benefit from this buy out by not having its own capital invested. Seagate’s share owners are also winners in this deal because they get the real value of the stock and the remaining 109 million Veritas shares. Seagate’s shareholders would also benefit from the fact that Veritas’s stock grew much more dynamically in the months following Veritas’s acquisition of Seagate’s assets. The value opportunity created is in the undervalued Seagate stock. Veritas benefits by having the EPS increase and higher dividends; Seagate benefits from having its stock value unlocked and tax savings realized by not selling its 40% equity stack in Veritas).
It is recommended that Seagate participate in this buy-out as the net benefit is realized for Seagate’s shareholders and significant tax liabilities are avoided. Veritas benefits from having a higher EPS as a significant amount of its stock is retired for no cost to Veritas.
List of students in case discussion held on January 19, 2013:
Lisa Range, Andrew Carleton, Marsha Miller, Trina Holland, Stephen Cheung, Tianna Bertsch, Ryan Moon, Richard Lange, Aaron Semaniuk, Shruthi Belle, Ola Lawal, Stephen Arseniuk, Mohammad Hafeez
Seagate Technologies Case Write-up
Mohammad F. Hafeez