History 2000: Seagate Becoming Private

It took a little longer than expected, but it’s a done deal, as of November 22.

The complicated financial terms involved 3 parties: Seagate Technology, Veritas Software and Suez Acquisition, a Cayman Island offshore created by a group of private equity firms led by Silver Lake Partners.

The shareholders of Seagate and Veritas approved the proposed transaction involving the sale of Seagate’s operating assets to Suez Acquisition, followed by a merger between Seagate and a subsidiary of Veritas Software.

As of this moment, Seagate is no longer a shareholder in Veritas, which garners those Gadzoox Networks securities previously held by Seagate as a result of the transaction.

The bottom line is that Seagate is once again a privately-held company, which has both its good points and bad. From now on, CEO Steve Luczo will no longer be obliged to throw crumbs every 3 months to industry analysts. The company will be free to do much more without having to answer to shareholders more concerned by the rising stock value than by the long-term development of the company. There will be no more quarterly business results in our columns helping us to judge the company’s performance. We’ll have to rely on the estimations and projections of market research companies, which in turn will be fed much less data than before (or will be obliged to paint general trends based on information subject to non-disclosure agreements).

In other words, it will be much harder to see what the firm is up to.

Seagate could seize the opportunity to undertake a discreet internal restructuring, quietly acquire another company or sign accords with new partners – all without our necessarily knowing.

But that’s not really the essence of Seagate’s reasoning, at least in the long-term. The company’s management has made no secret of the fact that the ultimate goal of this privatization is a fresh IPO. But that’s still a long way off. Investors are no longer interested in hardware, less so when it comes to storage hardware and almost not at all where HDD drives are concerned, for the simple reason that it’s not a profitable business activity.

Looking at a yearly average, each time an HDD maker sold a drive, it lost money. How could Seagate possibly hope to reverse this tendency? Either by slashing prices low enough to drive a competitor out of business (WD?), in order to acquire it more easily, thereby expanding, so as to build up a virtual monopoly and be in a position to dictate prices – or else by taking the opposite tack and deciding not to go along with spiraling fall of prices, at the risk of selling fewer units for a little while, in the hopes of provoking some new thinking, i.e. a reversal in price evolution among the two or three remaining giants.

Both alternatives, however, will be harder to manage now that the Maxtor/Quantum merger is a fait accompli, and, as a result, Seagate is no longer the market leader, and no longer calling the shots.

There is one more alternative for the Scotts Valley, CA, company: quietly move away from HDDs and gradually move towards storage subsystems.

Other questions remain with certain other Seagate activities: will it, for example, continue in tape drives, where growth and profits have not been up to snuff for some time now? Will it continue in capital intensive components manufacturing, be it for disk platters or magnetic heads? For several months, Seagate has been looking to push the automation of its production lines, and hasbeen streamlining the workforce.

In act, it is currently in the process of shutting down one of its 5 Malaysian plants in lpoh, which employs 6,000 workers to manufacture recording heads (HGAs, HSAs). There again, we’ll have to wait to see whether this policy is maintained.

In the end, however, everything depends on whether or not the new investors prove to be more interested in seeing a short or medium term return on their investment. It’s their money now.

This article is an abstract of news published on issue 155 on December 2000 from the former paper version of Computer Data Storage Newsletter.