Stock Market and Disk Drive Operations
Question: – Why is Seagate undertaking this transaction? Is it necessary to divest the Veritas shares in a separate transaction? Who are the winners and losers resulting from the transaction? Solution: – Seagate is undertaking this transaction to generate significant wealth gains for Seagate shareholders. There is a value gap generates due to Seagate’s VERITAS stake. VERITAS stake value exceeds the entire market capitalization of the Seagate.
Seagate faces two problems because of VERITAS stake. First, the company’s core disk drive operations were not receiving full value in the market.
Second, the company would incur a significant tax liability if the company attempt to monetize its VERITAS stake be selling the shares. Yes, it is necessary to divest the VERITAS shares in a separate transaction. It helps the company to save itself from tax liabilities and distributing the VERITAS stock tax free to its shareholders. The Seagate shareholders are definitely winner if the two-step transaction will happen. The shareholders of Seagate get higher value of disk drive operations and tax free shares of VERITAS. The Seagate Management is also winner.
They get rid of tax liabilities related to VERITAS stocks and get full value of disk drive operations. The VERITAS also feel like winner as they get higher number of stocks in exchange of lesser number of stocks. Question: – Does the negative value of Seagate’s operating assets imply markets are inefficient? Solution: – The negative value of Seagate’s operating assets implies that markets are inefficient. The core disk drive operations do not receive its full value in the market. Seagate’s Management thinks that disk drive operations value is larger than what the value is in market.
This shows that markets are inefficient. Question: – Why might a negative value exist? Solution: – Tax liabilities: – The negative value of the Seagate’s operating assets is due to tax liabilities which the company is facing because of VERITAS stocks. Other liabilities : – Fear that managers will destroy value: – The negative value of the Seagate’s operating assets is not due to fear that managers will destroy value. Moreover, the investors have trust in the managers of the Seagate that’s why they want to retain the top management of the Seagate in the newly build company.