Seagate Technology Buyout

Seagate was in a situation where the entire company's market capitalization was lower than the value of the Veritas stock they owned. That is, the Market Cap of Seagate was much lower than its main assets excluding its disk drive operation(Table 1). Furthermore, from the perspective of NPV of the estimated future revenue stream Seagate had been significantly underestimated in whatever scenario (Table 2 &3). Right before the transaction between Veritas and Seagate occurred; there was a good opportunity for arbitrage by buying Seagate's shares at the underestimated price. After the merger between Veritas and Seagate occurs, the value of those shares would increase. The shareholders can sell their shares at a higher price and thus obtain profit without carrying any risk.

If everyone would take the same position, the value of Seagate's shares would increase to equal the value of Veritas's shares, thus preventing the opportunity for arbitration.

The market perceived the Disk Drive industry as volatile and risky, because of the high level of competition, short life cycles, and the large amounts required for R&D operations. This perception resulted in the Seagate's underrated stock price and explained why Veritas shares owned by Seagate had a higher value than the entire market value of Seagate.

Another reason could have been that the market perceived the after-tax value of Seagate's shares on VERITAS, instead of their actual market value. The reason for it is that Seagate would have had to pay taxes if they wanted to monetize the shares by selling them.

There were some other "soft issues" that could have caused the relative price difference of Seagate and Veritas is that Seagate's management believed in the benefits of vertical integration, while the market thought that being vertically integrated was a disadvantage for the company.

The transaction is a