| Chuck Cory | ||||||
Advisors: Morgan Stanley Dean Witter (Seagate), Credit Suisse First Boston (Veritas), Silver Lake (Goldman Sachs)
This deal stands as a classic example of how to execute a complex transaction to the near-benefit of all parties. Two companies, a new buy-out firm (Silver Lake), the three big tech banking rivals, who just also happen each to own a small stake in Silver Lake, and a major tax headache as a result of an earlier stock-for-acquisition deal, all had the potential to turn this deal into the biggest mess of the year. In the event, it was just the opposite.
The rationale behind the deal starts with Seagate’s desire to get its share price moving, feeling, rightly, that it was undervalued. By the end, Seagate ceased to exist, and there were no hard feelings about it.
Step back to mid-1999. Seagate was a company with two major business lines: disk drives and software. Veritas approached Seagate about buying half of its software business, called Network Software Management Corporation. Seagate agreed, but Veritas was a relatively small company with a market cap of around $4 billion. So Seagate was paid in stock, 1.7 million of them.
Thus Seagate was now primarily one of the world’s leading disk-drive companies with the rump of its software business and a roughly 40% stake in Veritas.
In buying NSMC Veritas had added a Microsoft NT compatible software system to its Unix expertise, making a wholly rounded software company that the market fell in love with. Its share priced rocketed to take its market cap above $60 billion.
Seagate wasn’t so lucky. Its Veritas stake was worth $18 billion or more, yet its own market cap stood at $6 billion. So towards the end of 1999 it called in Morgan Stanley to look at its options. “After about a month we went back and told them that investors like pure plays, that their stake in Veritas held them back, and that there was no way to sort it out and keep the company in its present format,” says Chuck Cory at Morgan Stanley Dean Witter. The trouble was that selling the Veritas stake would incur a huge capital gains tax bill. Seagate asked them actively to investigate other options.
After looking at about 10 options, some of which, says Cory, “made no sense at all”, Morgan Stanley settled a synthetic spin-off of the stock. “Tax law allows you to spin off an asset and so avoid tax at both the corporate and shareholder level,” says Cory. “The trick was to get the Veritas stake to be a spin-off.”
The answer was to persuade Veritas to buy the rest of Seagate’s software business, have them pay for it in stock, and then once they owned the company buy back the old stock from the 1999 deal in a treasury auction and cancel it.
Fine, said Veritas, but only for the software business. The company had no interest in the disk-drive business. “So here was the jigsaw puzzle: we had a way to avoid the tax issue, but only if we could also dispose of the disk-drive business,” says Cory.
That involved discussions with about five strategic buyers, all of whom said no. Silver Lake, though, said it would buy it. “There were a series of bilateral discussions and agreements which at times got intense,” says Greg Gonsalves at Goldman Sachs, Silver. “Initially we had some scepticism around being able to agree to a three-way transaction, but we all did a good job of optimizing the deal for all three parties and the shareholders.”
After a short period of horse trading the deal was secured: Silver Lake would do a leveraged buyout of the disk-drive business for $2 billion, after which Veritas would do a stock buy of the rest of Seagate. In all, the deal was worth $20 billion, and the structure saved Seagate shareholders about $7 billion in taxes.
