Seagate Technology Mulling Potential Buyout Offer

Private equity firms have approached Seagate about taking the hard disk drive maker private, according to Bloomberg, in a deal that may be worth $7.55 billion.

Seagate Technology is considering going private, the company announced after the markets closed on Oct. 14.

In a statement, Seagate said it had received a "preliminary indication of interest" from an unnamed party for a leveraged buyout and its board is evaluating the offer and other alternatives.

"There is no assurance that the company will receive a formal offer or that any transaction will take place," the hard drive maker said.

The company refused to identify the interested buyer, or comment on any of the terms being discussed.

However, the Bloomberg news service named private equity firms Texas Pacific Group Capital and Kohlberg Kravis Roberts as the firms in talks to buy Seagate, citing anonymous sources with direct knowledge of the discussions. According to the Bloomberg article, the two private equity firms are considering an offer of about $16 per share. Seagate's share price closed at $12.69 on Oct. 14, prior to the announcement, putting Seagate's total value at $7.55 billion under such an offer.

At that price, taking Seagate private would be one of the largest private equity deals in tech history.

News of a potential buyout sent investors into a frenzy during trading Oct. 15, with Seagate stock surging 22 percent to close at $15.51. Seagate ended the week with a stock market value of $7.2 billion.

Industry watchers have worried about the impact on the HDD (hard disk drive) business as companies shift away from the trusty magnetic disk drives toward faster and more rugged flash-based alternatives. The immense popularity of mobile devices and tablets has also impacted PC and laptop sales.

"We remain concerned that consequent to the 'tablet invasion,' the PC segment is likely to stay weak for all HDD vendors in the historically stronger second half of this calendar year," ThinkEquity analyst Rajesh Ghai wrote in a research note, hours before Seagate announced it was in buyout talks.

Kaushik Roy, an analyst with Wedbush Securities, said a private equity firm could be interested enough in Seagate to wait out the downturn in demand for hard drives. The hard drive market is notorious for its cyclical swings of high demand and over-capacity.

"The weakness in the stock is in end-demand and market-related, it's not that the company is misexecuting. So private equity is looking at it and saying, geez, these are cheap stocks," Roy said.

Roy and other analysts have said they believe companies such as Seagate and Western Digital can survive the SSD challenge and develop their own flash storage products.

Deutsche Bank analyst Sherri Scribner noted that Seagate had $190 million in free cash flow in fiscal year 2009, at the height of the recession, despite a 23 percent decline in revenue. The company reported $1.3 billion in free cash flow for fiscal year 2010. "Despite recent declines, the industry is more profitable than in the past. We believe this ability to generate cash in the worst of times could be attractive to private equity firms," Scribner wrote in a research note.

Going private is not new for Seagate. A group of private equity investors led by TPG Capital and Silver Lake Partners bought out Veritas in a $20 million deal in 2000. It was the biggest such deal in IT history. Seagate had a $1.7 billion portion in that deal.

TPG Capital and Silver Lake Partners took Seagate public in late 2002, raising $870 million in its IPO (initial public offering). It was the biggest high-tech IPO that year.

Ironically, the sameSilver Lake Partners might have been considering bringing Seagate back into the fold. According to unnamed sources familiar with the discussions, TPG Capital and Silver Lake Partners were in talks in September to take Seagate private again, but those talks collapsed when Seagate was unable to meet certain price requirements, Bloomberg said.

The HDD industry is dominated by three players, Seagate, Western Digital and Hitachi. Seagate holds 30 percent of the overall hard drive market and close to 60 percent of the enterprise storage market, according to ThinkEquity.

With the buyout buzz, there was some speculation that a larger tech company might scoop up Seagate instead. Caris & Co. analyst Robert Cihra disagreed, writing in a research note, "We think the options for industry merger are quite limited ... given potential antitrust issues, while we'd be shocked if any end systems [manufacturers] wanted to vertically integrate HDDs." Cihra said Seagate going private is "increasingly likely."

Western Digital's stock also rose over 8 percent on the tail of Seagate's announcement.

The company has retained Morgan Stanley & Co. and Perella Weinberg Partners to provide financial advice and Wilson Sonsini Goodrich & Rosati and Arthur Cox as legal counsel, according to the statement.

TPG Capital and KKR are looking to contribute about $4 billion in equity and may seek additional partners, Bloomberg said, naming Bain Capital as a possibility.

None of the named parties has offered any comment on the talks so far.