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Seagate Plans Another Makeover – but Is Anything Different This Time?

{complink 4842|Seagate Technology Inc.} and {complink 379|Apple Inc.} do not belong in anyone’s classification of a “peer group.”

Somehow, though, Seagate’s management thinks the company belongs with Apple — along with {complink 1131|Cisco Systems Inc.} and {complink 2657|Intel Corp.}, amongst others — in a class of companies that investors might want to group together when weighing the performance of their investments. Seagate made this “peer group” classification in its latest annual US {complink 7644|Securities and Exchange Commission (SEC)} filing.

The 17-member list includes other industry leaders like {complink 5703|Texas Instruments Inc.}, {complink 1781|EMC Corp.}, and {complink 831|Broadcom Corp.}, as well as equity market laggards like {complink 3538|Motorola Inc.}, {complink 103|Advanced Micro Devices}, and {complink 3071|Lexmark International Inc.}.

Obviously, Apple is the extreme example here. Apple belongs in its own ZIP code in terms of annual rate of sales growth and equity performance. In the last week alone, the company’s stock price has surged more than $17 billion — after shares went up more than $20 apiece — while Seagate’s entire market value is just under $8 billion, even after a recent runup fueled by speculation that a leveraged buyout of the company is being considered by the management.

Why would Seagate put itself in the same play-pen with Apple? Perhaps because the two are tangentially related: Seagate is a supplier of disk drives used by Apple. A more likely reason, a cynic might note, is that Seagate wants to clearly demonstrate how lowly it is valued by investors relative to companies it would like to emulate.

If that is the case, then Seagate is making a very valid point. According to its SEC filing, the company’s sales-to-market-cap ratio as of Nov. 30, 2009, was 1.36 versus 0.22 for Apple, 0.27 for Cisco, 0.31 for Intel, and even 1.00 for rival disk drive vendor {complink 6308|Western Digital Corp.}. As of the period marked by Seagate, only two of the companies it considers peers — AMD (1.60) and Lexmark (1.95) — had worse such ratios.

Months later, the situation has not improved that much for Seagate. As of the close of trading Monday, Oct. 18, Seagate’s sales-to-market-cap ratio based on fiscal 2010 performance had worsened to approximately 1.52. Meanwhile, Apple’s ratio remained at 0.22 while AMD’s improved to 1.15 and Lexmark’s to 1.08.

It’s understandable that Seagate would be seriously considering an offer to be delisted and turned into a private enterprise by a group of leveraged buyout specialists. In addition, its board of directors said the company would be reviewing other strategic options, which could mean anything from a merger with a rival to making another acquisition similar to its purchase in May 2006 of rival Maxtor Corp.

Will any of these moves change the dynamics for Seagate? And would investors be more willing to pay more for the company’s shares? I doubt it. The problem is not that Seagate is not performing well or that its sales have fallen off the cliff. On the contrary, the company regained its sales growth in fiscal 2010, ended July 2, when annual revenue rose to $11.4 billion, up 16 percent from fiscal 2009. Seagate’s volume shipment continues to rise, much as it did even in the prior year when savage average price reductions cut into sales.

The real problem is that Seagate is in a slow growth sector. It is a component and subsystem vendor in a market where interest has moved from the guts of high-tech equipment to the software interface and the sleekness of the product. Seagate tried before to change investor perception when in 2000 it was acquired for $20 billion in a complex transaction orchestrated by {complink 7026|Silver Lake Partners} and which included Veritas Software, {complink 6812|Kleiner Perkins Caufield & Byers}, and the Texas Pacific Group.

There are two groups the new plan to become a private enterprise could affect. The first is the company’s customers. They should not panic. They won’t feel a thing. Seagate will continue to provide the great products it has always made. Potential investors, on the other hand, may want to jump in before the company is taken private.

Overall, Seagate still represents a good investment, but the companies that want to take the company private should be extremely careful: The last time, they lost their shirt on the deal. The numbers may look good, but goodwill for a technology hardware company isn’t what it should be.

11 comments on “Seagate Plans Another Makeover – but Is Anything Different This Time?

  1. itguyphil
    October 19, 2010

    I think that as long as Seagate keeps its OEM and partner realtionships intact, they should be a good player in the storage market for some time. For the most part, they have done a great job at improving the reliability and performance of their disks in the last decade.

    I'm not too sure about the effect of going private but as long as their business practices stay on the lean side and their industry brand does not suffer any major setbacks, the company should be ok (in my eyes…).

  2. Anna Young
    October 19, 2010

    I don't know how well Bolaji dug into Seagate's past or the activities of the private equity group that in the past took the company private and want to do an encore but these guys don't horse around with their money. They will do their homework. You can count on that. If they are already talking with Seagate, you can bet they've done some homework and that the numbers are looking good from their perspective.

  3. itguyphil
    October 19, 2010

    Anna,

    Good point. But there have been companies in the past that make acquisition blunders. I wouldn't count on that as an indicator that a company is viable. Rather, look at how they've been operating for the past 3-4 fiscal years. As far as my indicators tell me (especially with the economic times taken into consideration) that they're doing well realtively speaking.

  4. Anna Young
    October 20, 2010

    pocharle, It seems Seagate isn't doing as well as might be expected of a company that's a leader in the industry. It reported results today and its performance did not match analysts' expectations. The company is dealing with excess supplies of drives in its market and rival Western Digital is breathing heavily down on it. I would say Seagate could be in trouble. Time for a closer look at its financial performance. Perhaps the folks who want to take it private believe the management is the problem. Maybe Bolaji can offer us some insight into Seagate. I also wonder if Seagate is a ticking timebomb.

  5. bolaji ojo
    October 21, 2010

    EBN columnist and long-term editor in the electronics industry Tam Harbert mentioned to me recently that the leveraged buyout group that took Seagate private at the beginning of the decade actually got hefty returns on their investment when the company had its initial public offering in December 2002. Although figures are hard to come by, Tam pointed to a story she wrote in March 2003 where she explored the profits made by the group that took the company private.

    If the LBO group made out like bandits 8 years ago, it is understandable why they may be swarming around Seagate again. It tells a lot about the company's management too. What exactly are they doing wrong and how did this market leader close its last quarter with almost net zero in cash? I hope to look further into Seagate in a future article.

  6. maou_villaflores
    October 24, 2010

     I think Seagate makeover strategy is good. In the OEM industry you need to be more flexible to the needs of your clients. But for Seagate to stay in the game they need to revamp their OEM Alliance strategy and expand their market other than their current OEM partners.

  7. itguyphil
    October 24, 2010

    maou_villaflores,

    Thanks for the comment. I think that as long as Seagate can keep Apple as a customer, they will be okay. With the slate of notebooks that they have been putting out on the market and the love of Mac products, they have a great partner in Apple.

    I think they also have a long-term deal with Dell. If they could pickup a few more partners like that, they would be stable to say the least.

  8. DataCrunch
    October 24, 2010

    This is not a problem that is unique to Seagate, but rather a problem for HDD manufacturers as a whole.  Western Digital is also seeing a weakening of demand and according to their CEO, could see a 10-20% drop in HDD demand over the next four quarters or more.    This is due to the increased demand in SSD due to the popularity of iPads and tablets.  With the launch of Apple’s MacBook Air, could this be another trend for diskless devices?  Apple may be a good partner now for Seagate, but how does that look for the long run? 

  9. Rick Merritt
    October 25, 2010

    Great analysis, Bola. And Tam is right, last time investors made a pile–I am told–on the private-to-public-again maneuvers.

    I'd love to see an analysis (or hear comments about) of WHY investors did well then and WHAT if any changes the private-to-public-again shift had on Seagate's OEM customers.

    Drive on!

  10. Anna Young
    October 26, 2010

    Rick, Thanks for the observation backing up Tam Harbert's comments. In addition to the questions you raised, I would like to know what exactly the private equity group would do different with Seagate now that they didn't do years ago. Would they reshape the company management, refine product lines and reorganize operations? If the company is being considered for private ownership only years after it went public, why is this beginning to look like a recurring nightmare? And, do you think they will get it right this time?

  11. bolaji ojo
    October 26, 2010

    Hi Rick, Good to read your posting. As a veteran of this market you know the issues quite well and Seagate's current market position as well as the interest shown in the company by the private equity group of investors is interesting. Tam Harbert correctly pointed out that the previous equity group made a bundle on their Seagate investment 10 years ago. I am just puzzled as to why this is happening again. It's like Groundhog Day. If they take the company private again what exact changes will be made and what would be the long-term implications of this move on Seagate and also on the HDD market?

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