Questions:

Q2. Prepare the WC Schedule and calculate the change in WC on YoY basis for the forecasted years, as per the information given in Exhibit 8. (You may take appropriate historical assumptions, just mention them properly)

Q3. Calculate the Cost of Equity. Assume the Equity Risk Premium to be 8.88%. (Hint: In this question you need to calculate the Cost of Equity using Unlevered Beta rather than Levered Beta, given in the case. Read about Unlevered Beta and how to calculate it.)

Q4. Compute the growth rate of the firm (Hint: Growth Rate = Reinvestment Rate * ROIC; take Reinvestment Rate = 26.54%)

Q5. Compute the value of the firm using the information given in Exhibit 8. (Hint: You don't need to subtract interest from EBITDA) [ FCF = EBITA*(1-T) + Dep - WC - CapEx ] (Don't forget to add PV of TV)

Bonus Ques: You may leave this if you want to. The value that you computed in Q5 is actually of the unlevered firm. Compute the value of the levered firm by reading about APV. (Hint: Value of Levered Firm = Value of Unlevered Firm + Tax Shield [Debt*Tax] )

SEAGATE TECHNOLOGY BUYOUT

In early November 1999, Stephen Luczo, president and chief executive officer of Seagate Technology, Inc. ("Seagate"'), met with representatives of the private equity firm Si1ver Lake Partners L.P. to discuss a major restructuring proposal. Seagate was one of the world's largest manufacturers of computer disk drives and related data storage devices, with approximately $6.5 billion in annual revenues. The restructuring contemplated a leveraged buyout of Seagate's disk drive operations, followed by the tax-free acquisition of Seagate's remaining assets by VERITAS Software Corporation, an independent manufacturer of storage management software. Besides the disk drive operations, Seagate's main asset was a significant ($21 billion) stake in VERITAS's common stock. Management and Silver Lake believed the two-step transaction could generate significant wealth gains for Seagate shareholders. The need to take some action had become increasingly apparent since late summer, when, following a major run-up in VERITAS's stock price, the market value of Seagate's VERITAS stake had come to

substantially exceed Seagate's entire market capitalization. Management attributed this "value gap" to two factors. First, the company would incur a significant tax liability if it attempted to monetize its VERITAS stake by selling the shares, and this liability was capitalized in Seagate's stock price. Second, the company's core disk drive operations were not receiving full value in the stock market, which currently favored Internet businesses and companies that manufactured cheaper data storage hardware. The proposed transaction was designed to allow Seagate shareholders to realize full value for the company, by distributing the VERITAS stock tax-free, and by selling the disk drive operations at fair market value.

The transaction raised a number of thorny issues, however. First was the question of how much the investors should pay to acquire Seagate's disk drive operations. Since Seagate was a public company, Luczo and the other company directors had a fiduciary duty to obtain a fair price for their shareholders in the sale. However, Silver Lake and its co-investors had to earn a rate of return on their investment that would adequately compensate them for the risks they would incur, and Luczo and other key senior Seagate executives would continue to manage the disk drive business.

A second issue was how the buyout should be financed since this would directly determine the capital structure of the new Seagate. This was a pioneering transaction in the emerging area of technology buyouts, and traditional buyout financial structures might not be appropriate.

Third, the deal had to address the needs and concerns of VERITAS, as an essential participant in the transaction. The terms of the second-stage merger, therefore, had to be attractive to VERITAS shareholders as well. Without their consent, the restructuring could not be done.

Finally, Seagate's board had considered several alternative options for addressing the company's low stock price. These included repurchasing Seagate stock and selling off part of the VERITAS stake, undertaking a tax-free spin-off of either the disk drive business or the entire VERITAS stake, and selling Seagate as a whole. The Silver Lake transaction had to be approved by both Seagate and VERITAS shareholders, so it was necessary to show that the transaction dominated these alternative restructuring options.

Negotiations among Silver Lake, Seagate, VERITAS, and their advisors continued through March 2000. The transaction was extremely complicated, and there was no guarantee that deal terms could be found that would be acceptable to all parties.

The Disk Drive Industry

Hard disk drives were the most common medium for storing electronic information and data, thus making them the largest sector of the information storage industry. Disk drives were integrated into various products, largely classified into three main markets:

• Desktop: The desktop market included all desktop personal computers, targeted for

either home or business use. For the most part, performance attributes (speed capacity, etc.) and quality were standardized across disk drive manufacturers. Furthermore, there was little disk drive brand awareness at the PC consumer level. As a result, disk drives had become commodities and manufacturers competed largely on price. Gross margins in the desktop sector were around 10-15%.

• Enterprise: The enterprise market included high-performance workstations, servers, minicomputers, mainframes, and redundant arrays of inexpensive drive (RAID) subsystems. Because most applications and software that ran on enterprise systems were highly computation- and data-intensive (such as CAD/CAM, the science of these disk drive products emphasized performance and reliability, as well as price, as key selling points. The enterprise market was characterized by higher value-added products than those in the desktop market, with higher average gross margins of 20-25%.
• Mobile: The mobile market included laptop computers, hand-held computers, and personal digital assistants. Mobile disk drives differed from desktop drives in that they were smaller, and were made from more durable materials. Profit margins were higher than in the desktop segment, as products competed on not only price but also durability and power consumption. In the long run, however, analysts expected the markets for mobile and desktop drives to converge.

Table A summarizes worldwide market shares for the major disk drive manufacturers. Six firms accounted for 95% of all sales. The competition was intense, with manufacturers fighting for a limited number of major customers. These customers would normally do business with only two or three disk drive suppliers at a time. At the beginning of each new product cycle, which usually lasted from 6 to 12 months, customers would pre-select

TABLE A Total Marketa Enterprise Desktop Market Share in the Worldwide Disk Number of units shipped Drive Industry, 1999 Seagate 21.1% 41.0% 21.1% Quantum 17.1 7.2 20.5 Source: "Disk Drive Quarterly IBM 14.0 34.6 6.1 Report" (March 2000) by Salomon Smith Barney. Maxtor 13.3 b 17.7 Fujitsu 12.3 8.8 12.4 Western Digital 11.1 3.8 14.6 Samsung 5.9 b 7.5 Total sales ($millions) $25,273 $7,438 $14,627 "Includes mobile. b Amount is not material.EXHIBIT 1 Worldwide Hard Disk Drive Industry Historical Performance and Projections, 1991-2003E Source: Computer Industry Abstracts ( various issues) and "Disk Drive Quarterly Report" (June 1999) by Salomon Smith Barney. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000E 2001E 2002E 2003E Total Sales (000s of units) 33.1 38.4 51.8 69.0 90.0 106.8 129.3 143.6 165.9 187.8 212.5 238.1 268.2 Y/Y % Change 16.0% 34.9% 33.2% 30.4% 18.7% 21.0% 11. 1% 15.5% 13.2% 13.1% 12.1% 12.6% Total Revenues (millions of $) $24,300 $26,200 $21,730 $22,966 $22,991 $27,596 $27,340 $25,483 $25,273 $26,640 $28,409 $30,450 $32,699 Y/Y % Change 7.8% -17.1% 5.7% 0. 1% 20.0% -0.9% -6.8% -0.8% 5.4% 6.6% 7.2% 7.4%from Yahoo. EXHIBIT 4 Stock Market Valuation of Seagate and VERITAS Stake Source: Casewriters' estimates based on stock prices compiled Millions of Dollars 25,000.0 20,000.0 10,000.0 15,000.0 5,000.0 0.0 28-May-99 1 1-Jun-99 25-Jun-99 9-Jul-99 23-Jul-99 personal taxes paid by Seagate shareholders on any proceeds distributed by Seagate. ("(Number of shares of VERITAS held by Seagate) x (VERITAS closing stock price). 6-Aug-99 20-Aug-99 3-Sep-99 17-Sep-99 1-Oct-99 15 Assumes Seagate sells its entire VERITAS stake at the pretax value, and pays a 34% corporate tax on the full proceeds. Ignores any 15-Oct-99 After-Tax Value of VERITAS Stake (b) 29-Oct-99 Pre-tax Value of VERITAS Stake (a) Seagate Market Capitalization 12-Nov-99 26-Nov-99 10-Dec-99 24-Dec-99 7-Jan-00 21-Jan-00 4-Feb-00 18-Feb-00 3-Mar-00EXHIBIT 5 VERITAS Software Summary Financial Data on VERITAS Dec96 Dec97 Dec98 Software Balance Sheet ($ Million) Source: Compustat and SEC Cash and Equivalents $67.6 $151.3 $278.2 Filings. Net Receivables 16.0 30.3 52.7 Inventories NA NA NA Net Property, Plant, and Equipment 7.0 10.1 26.5 TOTAL ASSETS 94.5 241.9 349.1 Accounts Payable 1.8 1.6 5.0 Short-term Debt 0.1 0.0 0.0 Long-term Debt 0.5 100.0 100.0 Shareholders' Equity 75.0 104.2 169.9 Stock Market Information Total Book Debt (3/10/00)-$ Millions 451 Equity Betaa 1.81 Stock Price (3/10/00)-$/Share 168.69 Shares Outstanding (3/10/00)-Millions 393.6 "Equity beta estimated using daily returns over the six-month period from 9/1/99 to 3/1/00.EXHIBIT 6 STEP 1: Seagate sells all operating assets to group of investors (the "Seagate Technology Buyout"). Key Features of Proposed Cash Transaction between (Buyout Purchase Price) Seagate Technology and VERITAS BUYOUT SEAGATE Source: VERITAS and Seagate INVESTORS TECHNOLOGY Joint Proxy Statement/Prospectus dated October 23, 2000, and . Operating Assets casewriter adjustments. . $765 Million Cash STEP 2: Seagate exchanges existing equity stake in VERITAS for new VERITAS shares. The remaining Seagate assets are distributed to shareholders. SEAGATE SHAREHOLDERS . 109 Million VERITAS Shares . Cash Proceeds of Buyout . Cash in Excess of $765 Million SEAGATE TECHNOLOGY . 109 Million VERITAS Shares . 128 Million VERITAS Shares VERITAS SOFTWAREEXHIBIT 10 Market Interest Rates (March 2000) Source: Standard & Poor's Datastream. Corporate Long-Term Bonds Government Securities AAA AA A BBB BB B 3 Month 6 Month 30 Year 7.01% 7.14% 7.31% 7.72% 9.18% 10.44% 5.88% 6.15% 5.84% EXHIBIT 11 S&P Key Industrial Financial Ratios by Long-Term Debt Rating Source: Standard & Poor's Credit Week, September 2000. Three-Year Medians-1997 to 1999 AAA AA A BBB BB B CCC EBIT Interest Coverage 17.5x 10.8x 6.8x 3.9x 2.3x 1.0x 0.2x Total Debt as % of Market Cap. 3.7% 9.2% 16.4% 30.4% 47.5% 59.3% 74.3% "Defined as the ratio of Total Debt (long term and short term) to Total Market Capitalization (the sum of total debt, minority interest, preferred equity, and year-end market value of equity).EXHIBIT 7 100% Capitalization Structure for LBO 90% Transactions (1980-1999) 80% 45% Source: Reproduced from "The 50% Emergence of Technology 70% 61% 63% 60% Buyouts," an HBS student project by George Taylor. Original data from Chase Securities, Inc. and Thomas H. 60% Lee Company Research 50% 40% 20% 35% 30% 23% 29% 20% 40% 30% 10% 20% 16% 8% 0% Early 80s Late 80s 1990-1991 1992-1993 1994-1998 Roaring "Recession' 'Rebirth" "Bull Market" Equity Senior Debt (a) Subordinated Debt (b) "Senior debt is defined as all debt instruments, which have first priority in a liquidation or bankruptcy. " Subordinated debt is defined as all debt instruments that have lower priority than senior debt in liquidation.EXHIBIT 8 Projectd Operating Performance of Seagate Disk Drive Business Source: Casewriters' estimates based on revenues and EBITA projections contained in SEC filings. Year Ending June 30, 2000 2001 2002 2003 2004 2005 2006 Base Case ($ million) Revenues $6,619 $7,417 $8,564 $9,504 $10,416 $11,359 $12,350 Gross Margin 1,264 1,409 1,696 2,043 2,312 2,624 3,026 EBITA 141 189 316 449 499 614 724 Depreciation 625 626 642 666 708 726 729 Capital Expenditures 627 690 720 795 700 725 750 Upside Case ($ million) Revenues $6,619 $8,185 $10,146 $11,283 $12,626 $13,961 $15,404 EBITA 141 365 689 783 867 1,000 1,167 Downside Case ($ million) Revenues $6,619 $7,393 $7,797 $8,310 $8,801 $9,269 $9,759 EBITA 141 189 322 363 378 403 407 "The "downside case" is based on the "buyer case" described in the first VERITAS and Seagate Joint Proxy Statement Prospectus filed with the SEC in May 2000.EXHIBIT 9 Morgan Stanley Under an engagement letter dated February 10, 2000, Seagate retained Morgan Fairness Opinion Stanley to provide it with financial advisory services in connection with a possible strategic business combination, restructuring or other transaction. Source: Seagate Technology. In connection with rendering its opinions, Morgan Stanley, among other things: Inc.. SEC Filings. Form 1363. Filed on May 19. 2000. -reviewed certain publicly available financial statements and other information concerning Seagate; -reviewed certain internal financial statements and other financial and operating data concerning Seagate prepared by the management of Seagate; -reviewed certain financial projections prepared by the management of Seagate; -discussed with senior executives of Seagate the past and current operations and financial condition and the prospects of Seagate. Morgan Stanley also reviewed for illustrative purposes estimated ranges of values for Seagate's operation businesses derived using various methodologies, including a comparable companies analysis, (. . .) a discounted cash flow analysis, and a hypothetical "sum-of-the-parts" analysis of Seagate's disc drives, tapes, information management, and storage area network segments. As part of this review, Morgan Stanley analyzed the two cases developed by Seagate management, as well as a third case developed by Morgan Stanley as a sensitivity case, which reflected Seagate management's base case but assumed that gross margins for the desktop segment of Seagate's disk drive business remained constant for years 2000 through 2008. For each of these analyses, Morgan Stanley calculated an implied value for Seagate's operation assets (. . .). The discounted cash flow analysis (was) based upon multiples of calendar year 2006 EBITA ranging from 6.0x to 9.0x and a discount rate of 15%.EXHIBIT 3 Summary Financial Data on Publicly Traded Hard Disk Drive Manufacturers Source: Data compiled from Compustat and SEC Filings. Seagate Technology Quantum HDD Western Digital Maxtor Jun97 Jun98 Jun99 Mar97 Mar98 Mar99 Jun97 Jun98 Jun99 Dec96 Dec97 Dec98 Income Statement ($ million) Sales $8,940 $6,819 $6,802 $4,591 $4,615 $3,599 $4,178 $3,542 $2,767 Cost of Goods Sold $799 $1,424 $2,409 6,918 5,830 5,250 4,093 4,242 3,308 3,464 3,187 2,562 842 Gross Margin 1,287 2,034 2,022 989 1,552 498 373 291 714 355 205 -43 EBITDA 137 375 1,521 451 1,011 146 -6 -61 365 41 -188 -191 -32 134 Depreciation + Amortization 501 589 613 109 68 71 63 107 131 47 66 74 Operating Profit 1,020 -138 398 37 -74 -133 302 -148 -319 -238 -97 60 Interest Expense 35 51 48 20 11 9 0 12 33 18 37 29 Net Income 658 -530 1,176 41 -53 -153 268 -290 -493 -256 Capital Expenditures -110 31 890 709 603 164 119 82 156 199 107 54 82 95 Balance Sheet ($ million) Cash and Equivalents $2,284 $1,827 $1,623 NA $325 $524 $208 $460 $226 $258 Net Receivables $31 $33 1,041 799 872 NA 586 392 546 369 273 89 248 318 Inventories 808 508 451 NA 212 148 224 187 144 81 155 153 Net Property, Plant, and Equipment 1,787 1,669 1,687 NA 228 199 248 347 238 TOTAL ASSETS 92 99 108 6,723 5,645 7,072 NA 1,646 1,470 1,307 1,443 1,022 315 555 863 Accounts Payable 883 577 714 NA 401 342 418 330 336 110 207 428 Short-term Debt NA 0 0 0 0 10 204 245 5 Long-term Debt 702 704 703 NA 109 115 0 519 534 229 224 145 Shareholders' Equity 3,476 2,937 3,563 NA 906 791 620 318 -154 -327 -221 169 Net Working Capital 2,717 2,241 1,773 364 464 72 93 440 170 NA 739 709 Capital Market Information ($ million) Year-end Market Equity Capitalization $5,861 $5,844 $8,620 NA NA NA $2,716 $1,043 $589 NA NA $1,320 Equity Betas 1.2 0.8 0.6 1.0 Total Book Debt (3/10/00) 704 110 236 114 Debt Rating BBB B2 B2 B1 Stock Price (3/10/00)-$/share 64.25 8.875 5.1875 11.625 Shares Outstanding (3/10/00)-millions 227.2 82.6 129.1 113.2EXHIBIT 2 Historical Operating Performance and Capitalization Ratios for Seagate Technology and U.S. Disk Drive Industry (1981 to 1999) Source: Casewriters' estimates based on data compiled from Compustat. 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Seagate Sales 9.79 40.45 110.41 343.90 214.65 459.84 958.07 1,265.97 1,371.57 2,413.18 2,676.98 2,875.27 3,043.60 3,500.10 4,539.57 8,588.35 8,940.02 6,819.00 6,802.00 9% Growth 313.2% 173.0% 211.56 -37.6% 114.2% 108.3% 32. 1% 8.3% 75.9% 10.9% 7.4% 5.996 15.0% 29.7% 89.2% 4.1% -23.7% -0.2% EBITDA 0.87 10.70 18.82 63.51 0.07 58.34 208.24 150.77 90.97 297.24 255.57 309.04 439.05 449.17 629.85 1,004.53 1,521.03 451,00 1,011.00 % Sales 8.9% 26.5% 17.0% 18.5% 0.0% 12.7% 21.7% 11.9% 6.6% 12.3% 9.5% 10.7% 14.4% 12.8% 13.9% 1 1.7% 17.0% 6.6% 14:9% EBIT 0.65 9.89 16.16 55.72 -12.01 39.18 180.63 100.40 12.96 179.32 117.31 139.91 284.03 310.96 442.98 627.38 1,019.83 -138.00 398.00 9% Sales 6.6% 24.4% 14.6% 16.2% -5.6% 8.5% 18.9% 7.9% 0.9% 7.4% 4.4% 4.96 9.3% 8.9% 9.8% 7.3% 11.4% -2.0% 5.9% Assets 9.47 43.47 157.25 214.72 275.23 305.08 814.12 1,093.95 1,076.77 1,851.46 1,880.06 1,816.60 2,031.19 2,877.53 3,361.26 5,239.64 6,722.88 5,645.00 7,072.00 Depreciation & Amortization 0.22 0.81 2.65 7.80 12.08 19.17 27.60 50.37 78.02 117.91 138.26 169.13 155.02 138.21 186.86 377.15 501.20 589.00 613.00 CAPX 2.45 5.04 38.83 42.66 31.22 38.68 78.40 284.41 78.09 102.38 90.87 90.66 173.57 197.68 353.43 906.94 890.46 709.00 603.00 Debt/Book Assets 19% 1% 5% 5% 13% 5% 37% 28% 29% 31% 23% 18% 14% 19% 16% 15% 10% 12% 10% Debt/Mkt. Assets NA 0% 1% 2% 9% 2% 14% 20% 24% 28% 27% 16% 14% 18% 12% 11% 6% 8% 8% (Debt-Cash)/Book Assets 18% -27% -10% 2% 11% -10% -11% 20% 11% 17% 9% -10% -17% -27% -21% -7% -24% -20% -13% (Debt-Cash)/Market Assets NA -6% -2% -1% 7% -5% 4% 14% 9% 15% 11% -9% -17% -26% -15% -5% -13% -13% -10% EBITDA Interest Coverage 10.12 57.84 47.05 73.51 0.04 20.26 41.01 6.88 3.77 6.10 6.01 9.09 18.67 17.05 19.11 17.99 43.66 8.84 20.25 EBIT Interest Coverage 7.56 53.46 40.40 64.49 -6.84 13.61 35.57 4.58 0.54 3.68 2.76 4.71 12.08 11.81 13.44 11.24 29.27 -2.71 8.29 Disk Drive Industry Medians EBITDA as % of Sales 8.9% 6.2% 7.3% 0.7% -4.4% 8.6% 7.8% 6.2% 7.3% 9.6% 8.6% 8.9% 3.9% 2.5% 4.7% 7.0% 9.3% 5.6% 6.1% EBIT as % of Sales 5.4% 3.2% 3.4% -3.5% -10.3% 5.3% 4.5% 2.3% 5.3% 5.9% 4.3% 5.9% -0.3% -2.4% 1.9% 3.9% 7.5% -1.4% 1.1% Debt/Book Assets 19% 9% 5% 12% 19% 13% 16% 12% 13% 10% 13% 16% 19% 12% 10% 13% 6% 14% 9% Debt/Mkt. Assets 7% 4% 1% 5% 7% 5% 7% 8% 8% 9% 8% 16% 13% 7% 3% 4% 1% 7% 4% (Debt-Cash)/Book Assets 9% -5% -12% 6% -5% -7% -11% 0% -5% -7% 2% -1% -9% 4% -8% -6% -21% -9% -23% (Debt-Cash)/Mkt Assets 0% -2% -6% -2% -3% -4% -4% -3% -2% -4% -1% -3% -3% -2% -3% -5% -8% -5% -5% EBITDA Interest Coverage 3.31 3.46 4.12 -1.58 -3.19 6.20 6.37 8.15 5.74 6.03 4.06 9.00 4.38 5.58 3.59 7.06 13.00 4.20 -0.09 EBIT Interest Coverage 2.19 1.42 2.34 -3.37 -7.57 2.25 1.94 4.58 2.71 3.30 1.55 4.31 -0.05 0.37 1.84 5.04 8.52 -2.04 -2.91