This allows for a sufficient tax shield to maximize the profitability of the buyout. By utilizing such leverage, we incur a great deal from the tax shield. Further, we would pay off the debt using our excess free cash flow to pay off the debt. By the end of the 5th year, we would sell the firm andgain from any excess value found within the firm.

1. About Seagate Case
This allows for a sufficient tax shield to maximize the profitability of the buyout. By utilizing such
leverage, we incur a great deal from the tax shield. Further, we would pay off the debt using our
excess free cash flow to pay off the debt. By the end of the 5th year, we would sell the firm
andgain from any excess value found within the firm.
Based on the scenarios in Ex. 81, and on your assessment of the optimal amount of debt to be
used in Seagate's capital structure, how much are Seagate Technology Buyout case solution?
Assume that of the $765 million in cash that the buyout team will acquire as part of the
transaction, $500 million is required for new investment in net working capital and $265 million
is excess cash. Also, assume that the buyout https://www.casementors.com/1207--Seagate-
Technology-Buyout-Case-Solution.html teamplans to pay down its debt as cash flows permit during
the forecast period. Estimate the value of Seagate's operating assets under the following two
scenarios:
Scenario (A): The buyout team plans to maintain the terminal debt level in perpetuity. * Scenario
(B): Beyond the forecast period, the buyout team plans to maintain its debt at a constant
percentage of the firm's market value.
In Scenario A, the Debt would remain at 0 for good. This results in a D/V ratio of 0 which gives us
a WACC of 9.21. Using the WACC to derive the Enterprise value of the company, it is found to be
$3.043B. Subtracting the debt of $1.25B, we have a Seagate Technology Buyout answers Value
of Equity of $1.79B. Subtracting the $765M that is being given to the Shareholders, the Value of
the Operating Assets are $1.028B. Specific assumptions made for this scenario is that the D/V in
perpetuity is 0. Also to pay the debt off in 5 years, the annual payment on the debt is $312M
In Scenario B, the Debt would remain at a constant level for good. By entering permanent D/V
levels we can manipulate the Debt into perpetuity as a percentage of the Enterprise value. The
below table gives the Value of the Operating Assets as a function of the Debt to value ratio:The
table shows that if a debt is kept through Perpetuity as a portion of the value of the firm, the
value of the operating assets increases (to a point). This is due to the interest tax shield that is
held. The WACC increases because of the use of debt (as a ratio of the higher cost of debt). In
reality a small debt should be held in the Seagate Technology Buyout pdf company to maintain
the credit rating and investor comfort. A company with debt has obligations beyond that of what
shareholders have under the law and therefore exerts a discipline of the firm.
Some assumptions made for the valuation:
Cash and Debt were assumed given the case. The fact that the company was completely wiped
of liquid assets would probably be incorrect as Net receivables could have been viewed as cash
for this valuation. The Operating Expenses were assumed to be 80% of sales. This was taken from
Seagate’s historical SGA. The growth in GFA was kept the same as sales growth over time. This
would be indicative of slow growth with no major asset acquisitions or sales. Depreciation was

2. assumed to be 37% of GFA. This assumption was made to coordinate with given data suggesting
identical rates. The increase in NWC Seagate Technology Buyout excel was kept at 7% of Sales
showing an increase to mimic the assumptions in the case $500M. The interest expense was
assumed to be 7%, and the interest income to be 1%. This was kept so low to show that available
cash would be used to pay off debt and not invest. The CAPM and WACC Variables were
calculated and given in the case. They are displayed below:
 Variable| Value|
 Rd| 8%|
 Beta Unl| 1.81|
 Rf| 5.88%|
 MRP| 1.84%|
 TG| 3%|
 Tax Rate| 34%|
Based on your valuation, what are the gains/ losses to the LBO team(Seagate's management and
Silver Lake Partners) and to the shareholders of Seagate?Would you, as ashareholder of Seagate,
agree to this deal?
In regards to the LBO team, the managers of Seagate are effectively stripping themselves of their
cash and VERITAS stock and getting back a much smaller version of Seagate with the ability to
apply a large portion of the transaction fee to research and development. For the LBO team, this
is a great deal. You are able to appease shareholders, and you are able to go back to making hard
drives. The issue is that the Buyout team is assuming that the VERITAS shares are overvalued and
their own shares undervalued. This is the markets’ way of saying that management is
underperforming. The path that was chosen seems like an attempt to restore faith in the
management team after the transaction. Even according to the case study assumptions, the
“downside case” shows the company making less than $100M in free cash flow by year 5!
Leveraging a struggling business and only slightly changing the business strategy (only entering a
single new product line) is extremely risky. Seagate Technology Buyout case study solution For
the Seagateshareholders, this is agreat deal if you are trying to exit the market. The large payday
of VERITAS stock and cash from remaining assets would allow you to divest from Seagate and
make alargeprofit. However, if my intention was to stay with Seagate, I would sellof the VERITAS
stock and buyback Seagate, at what I am sure would be a lower price. If I was a shareholder of
Seagate, I would vote yes for the transaction and walk away.