Seagate Cancels Buyout Talks, Initiates Stock Buyback

No one is buying Seagate, neither the private equity firms nor Toshiba. The company canceled the buyout talks and initiated a stock repurchase program.

After weeks of speculation, Seagate Technology has ended discussions with private equity firms about taking the company private. Instead, it will start a $2 billion stock repurchase program.

The company made the announcement after the stock market closed Nov. 29.

Seagate canceled talks "principally because it determined that the indications of the valuation range were not in the best interest of the company and its shareholders."

"They couldn't agree on the price," Kaushik Roy, an analyst with Wedbush Securities, told eWEEK. After issuing its forecast for earnings, Seagate walked away when the parties couldn't settle on a final price, he said.

Seagate was undervalued by the market, said Roy, which was why Steve Luczo, Seagate's CEO, originally went shopping for a deal in the first place. "If the market doesn't value you at what you think you are worth, you look for buyers who do," he said.

Seagate said in a statement that demand for hard disks had "improved," and it forecast revenues of at least $2.7 billion for the current quarter. Thomson Reuters has consensus estimates of $2.7 billion in revenue.

"Given the strong debt markets, improving business conditions and other financing options, Seagate has initiated a plan to further optimize its capital structure to maximize shareholder returns," said Luczo.

Instead of proceeding with a buyout, the board decided to authorize a $2 billion share repurchasing program. According to Seagate, the repurchase will be funded through a combination of cash on hand, future cash flow from operations and "potential alternative sources of financing."

Companies often initiate a buyback to boost stock price, Roy said. It's a way for the company to give a signal "that our stock is worth more," he said.

Seagate has been the focus of a lot of speculation since Oct. 14, when it initially announced that it was in discussions with a consortium of private equity firms. As firms dropped out of negotiations, there were reports of being acquired by Toshiba or one of its rivals.

According to Roy, there was not much left for the private equity firms to do once it took the company private. "If there was an opportunity to cut fat and make it more efficient, it makes sense. But there wasn't much left to cut. Luczo had already done a decent job," he said.

Seagate seemed upbeat about its prospects for the rest of the quarter. The "total available market in the December 2010 quarter is approaching 170 million units," the company said.

The optimistic forecast was announced the same day Gartner cut estimates on PC shipments because of the increasing demand for tablets. Gartner expects worldwide PC shipments of 352.4 million units in 2010, up 14.3 percent from 2009, but down from initial projections of 17.9 percent. Gartner also said worldwide PC shipments in 2011 will hit 209 million units, a 15.9 percent increase over 2010, but less than the initial estimate of 18.1 percent growth.

Roy expressed mild surprise at the outcome. "I was getting the sense that Luczo was getting it done. If anyone could have done it, it was him," he said.