Seagate Technology Buyout Case Solution
What are the benefits of leveraged buyouts?
The buyout consists of two different stages transactions, which include a leveraged buyout of the disk drive operations and a tax free stock swap with VERITAS. This option will benefit Seagateto address its low stock value. Secondly, it will also benefit Seagate to offload its VERITAS shares without undergoing significant tax liability.Furthermore, the company will take benefit from the tax shields that will rise from the payment of interest expenses by the company.
The current credit rating of the company is BBB and it is highly important for the company to maintain this credit rating. This is because the company has set aside total assets of $7072 million as collateral to maintain this credit rating with the current level of debt. One other thing should also be noted which is that, Seagate has been historically remained competitive and performed well in its both low end and high end markets.
The optimal debt structure for the company has been calculated in the excel spreadsheet. It could be seen that in order to maintain a credit rating of BBB, the optimal debt ratio for the company is to have a capital structure with 40% debt and 60% equity. At this level of debt the weighted average cost of capital for the company would be lower and thus, the company’ value would be higher at this optimal level of debt………………….
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