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Is Seagate poised to go private?

What spins around goes around

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Seagate has been in discussion with a pair of private equity firms about a move off the stock market and back into private ownership, according to reports.

The alleged discussions have been reported by normally reliable Reuters, Bloomberg and others.

The talks between Seagate, TPG Capital and Silver Lake Partners have not resulted in a decision yet but finance isn't the show-stopper, although Seagate is capitalised at $5.39bn. TPG and Silver Lake are the former owners of Seagate, buying it in 2000 and taking it public in 2002 for $12 a share. The shares are now trading at $11.43, a far from stellar performance. Over the same period Western Digital's shares have risen from $7 to $27.47, emphasising just how much money TPG, Silver Lake and other investors could have made by investing in WD instead of Seagate.

A buyout price of $7bn has been mentioned.

The usual reasons for taking a public company private are to make it more efficient by cutting costs and then selling it on at a higher price.

Seagate has stumbled of late, losing its disk drive unit shipment leadership position to Western Digital in the last couple of quarters. It is still the disk drive industry's revenue leader though.

The company made mis-steps in the 2.5-inch drive sector, letting competitors gain market share with better products. This partly caused the ejection of CEO Bill Watkins and his replacement as CEO by chairman Stephen Luczo in January last year. Luczo has instituted cost-cutting, with some redundancies and facility closures, but also pushed out new products by increasing the number of components in the company's drives to compensate for a slower advance in areal density.

These have included a 5-platter, 3TB desktop drive, a Momentus XT drive which includes an embedded flash cache to speed read I/O, and yesterday's 4-platter, 1.5TB, FreeAgent GoFlex consumer 2.5-inch drive. Seagate has also introduced its first solid state drive, the Pulsar, and instituted an agreement with Samsung to develop SSD controller technology.

This is in no way a struggling and unprofitable corporation but it is one that, in some people's minds, has not recovered from its mis-steps in 2008 quickly enough. Its last reported results didn't meet expectations and competitor Western Digital is now capitalised at $6.3bn, exceeding Seagate's value. It's said that Seagate's shares are trading at a low price compared to the company's revenues, making it relatively cheaper to buy.

However future projections of disk drive sales have been scaled back and it's reported that Seagate cannot see its way to high enough and consistent enough revenues to justify a buyout at the $7bn level.

There have been questions raised as to why Seagate has not appointed a new CEO yet. The inability to see off Western Digital and the possibility of a buyout indicate that Seagate has not yet settled on a way forward, and that financial manipulation is occupying the minds of its leadership as well as manufacturing efficiency.

You can't imagine John Coyne's crew at Western Digital being distracted in the same way.

While Seagate investors have been thinking of taking the company private, Hitachi disk drive-manufacturing subsidiary Hitachi GST has been thinking of going public via an IPO. It's reported that it is looking to raise $1bn and has appointed six banks to run the sale of stock. The company is still saying nothing publicly, apart from that it is exploring all options for business growth, including an IPO.

The word from people close the the UK side of Hitachi GST is that its execs are convinced an IPO is coming.

The main component of cost in a hard disk drive is the manufacturing. Making 100 million disk drives a year from a manufacturing base costing, for argument's sake, $3bn, means the average selling price for a drive has to be above $30 just to recoup the manufacturing cost. If Seagate were to buy Hitachi GST then it could make more drives and lower its average manufacturing cost per drive. Were it to make 150 million drives a year from a $4bn manufacturing cost base then its average manufacturing cost per drive would be $26.66, enabling more profit to be made.

Volume and manufacturing cost are the twin Gods of the hard disk drive industry, with the third celestial necessity being product performance leadership or equivalence with the competition. If Seagate can work these three entities to its advantage then it can regain unit ship leadership over Western Digital. That ought to send its share price up. ®

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