Seagate IPO more notable for selling

[Dave Farber <dave () farber net>]

------------------------------------------------------------------------Post
ed on Wed, Nov. 20, 2002

Scott Herhold: Seagate IPO more notable for selling
By Scott Herhold
Mercury News

One of my relatives, long since departed from this world, loathed the idea
of paying tolls when he traveled. Enraged at a nickel toll at a bridge, he
once flung down a coin and profanely challenged the toll taker to find it.

He would probably have detested the coming initial public offering of
Seagate Technology Holdings (STX). Not because the company is bad: It isn't.
And not because its leadership lacks creativity: It has plenty.

No, he would have objected to the toll. In this case, it's the quick profit
for Seagate's investors, a group of venture capitalists and private
shareholders selling IPO stock.

The rebirth of the disk-drive company on the public market is really two
stories intertwined: One is a tale of restructuring, of shedding jobs and
seizing market share. The second is a tale of successful financial
engineering.

It was only two years ago that a group of investors led by Silver Lake
Partners, Texas Pacific Group and August Capital invested $875 million and
borrowed an additional $800 million to acquire the disk-drive and
storage-area business of Seagate, the venerable Scotts Valley company once
headed by Al Shugart.

That going-private transaction was part of a complex deal to return some 128
million shares of Veritas' stock to Seagate shareholders -- stock that
Seagate had amassed by selling its software business to the hot young
Veritas.

At least some investors considered the deal for the disk-drive business an
afterthought. Disk drives? An old business facing cutthroat competition that
drives down prices 20 percent a year.

The newly private Seagate, however, had two distinct advantages: One was a
superb chief executive in Steve Luczo, a former investment banker. The
second was a group of canny investors led by David Roux and Roger McNamee of
Silver Lake and David Marquardt of August Capital.

Over the past two years, Luczo has flung himself into restructuring the
company, cutting 40,000 jobs and pouring money into research and
development. The company's share of the disk-drive market is 29.2 percent,
up from 23.5 percent in 2001.

Luczo was able to do that partly because Seagate was private. His investors
were a clubby group. And he could make tough decisions without worrying
about shareholder lawsuits or market whims.

Now those investors want a down payment on their investment. The company's
prospectus says they intend to sell 48.5 million shares in the offering,
part of their roughly 400 million shares. The company itself intends to sell
24 million shares.

The math tells the story behind this bonanza. The investors and managers
were able to buy their Seagate stock at a price estimated at $1.96 a share
-- and they're selling for an expected $14 two years later. Not a bad return
in a massive tech recession.

What they're making in the IPO -- plus the $261 million in cash distribution
they're expected to receive shortly before the offering -- will nearly cover
their investment.

Now I'm enough of a capitalist to cheer Seagate's IPO. It's one of the few
success stories in tech this year. And it's fair to point out that this was
no slam-dunk. The investors and managers took a risk. Given that the Seagate
IPO was repeatedly delayed, maybe they deserve a payday.

But public shareholders shouldn't forget one simple fact. The smart money is
selling in this IPO, not buying.

FYI An intriguing twist to the Seagate offering is reflected in the chart of
Western Digital (WDC), a Southern California disk-drive maker that is a
smaller competitor to Seagate. Over the past two months, WDC has soared 104
percent, from $3.85 to $7.84.

One line of speculation among savvy traders is that WDC has become a
tracking stock for Seagate. The buzz is that buyers close to Seagate's
investors are bidding up WDC as a way of making the Seagate offering more
attractive.

Unfortunately, this can't be confirmed -- though it's worth pointing out
that it doesn't take much volume to drive the much-smaller WDC stock, which
trades an average of 1.8 million shares a day.

``I wouldn't totally refute that,'' said Bob Blair, Western Digital's vice
president of investor relations. ``But I'd point to the fact that our
financial performance has been extraordinary.''

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