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I thought I would pass this on for your reading enjoyment...Have a good one, Michael

Seagate faces moment of truth about Veritas
BY SCOTT HERHOLD
Mercury News Staff Columnist
STEVE Luczo looked a little weary -- and wary -- at a Goldman Sachs investment conference in Palm Springs last month. A persistent investor was quizzing the Seagate Technology Inc. (SEG) chief about what he intended to do with Seagate's fabulously valuable stake in Mountain View-based Veritas Software (VRTS).

After parrying the investor's questions good-naturedly for a couple of minutes, Luczo told him -- in jest -- ``Look, why don't you come up here and I'll tell you everything we've considered. Then you can be an insider and I'll tell the SEC to watch your trading.'

The sally shut the investor up. But it's hardly quelled the barrage of questions that Luczo, a former investment banker, has had to answer over the last few months about Veritas. As he told the Goldman investors, ``I get a little tired of being asked about this every 20 minutes.'

Simply put, the problem is an embarrassment of riches. Not long after the 43-year-old CEO took over the old-line disk drive company from Al Shugart in the summer of 1998, he decided to sell Seagate's network and storage software business to Veritas, an up-and-coming young software company, for $3.2 billion in stock.

The deal, which closed last May, may have been the most profitable transaction in Seagate's history. Because Veritas has soared wildly, Seagate's stake in the company is now worth $21.6 billion, half again as much as Seagate's $13.9 billion market cap. Think of a seal spawning a walrus and you get the picture.

There's plenty of irony here. When Luczo was brought into Seagate in 1993, one of his chief missions was to build up the company's software operations. But as CEO, he had to focus on Seagate's traditional but unsexy business.

``Luczo had a full plate,' says Jim Porter, founder of Disk/Trend Inc., a Mountain View market research firm. ``He didn't have that much time to spend on the software thing. So getting rid of the biggest and most valuable part of it to Veritas made great sense.'

Luczo ought to get kudos for what amounts to a great investment. For that matter, Seagate also holds hugely valuable stakes in SanDisk (SNDK), Gadzoox Networks (ZOOX) and the private company Dragon Systems, which is developing voice-recognition software in Newton, Mass. By some estimates, those investments are worth another billion or so.

These holdings have undoubtedly helped boost Seagate's stock, which closed Friday at $64.25 per share. By way of comparison, the last time Seagate saw these levels was in 1997, when it was making roughly $4 per share. Now the consensus of analysts is that it's making less than a dollar per year. Something else is driving the stock price beyond the promise of disk drives.

Yet Luczo is being badgered by investors who want to know when they can get a piece of Veritas -- in short, when the company can begin unlocking the value of its investment. Luczo has said he understands this desire. But there are huge tax obstacles in the way.

A Seagate spokesman, citing the quiet period before the company's upcoming earnings announcement, declined to answer questions. But the company has said publicly that it will entertain suggestions from anyone who can help it structure an answer to this dilemma.

``If I had an easy answer to that, Seagate would give me a lot of money,' says Paul Fox, an analyst with Banc of America Securities.

I'm not going to pretend that I know the answer. Nor am I going to pretend that saving Seagate a tax bill is a crowning moral imperative. But who knows? Maybe a reader has a solution. A few billion dollars rides on the answer.

Here are some of the possibilities that help frame the issue -- and my commentary. You'll see that each has drawbacks.

A) Seagate should distribute its Veritas stake to its shareholders. At first glance, this seems like the straightforward answer. But tax experts say it's likely to provoke two rounds of taxes: one for the corporation, which must realize its gain in Veritas stock, and a second time for individual investors, who will be subjected to another capital gains tax. For Seagate, it's a tax bite between 36 and 41 percent.

B) The company should spin off its software unit, which now controls the Veritas stake. This is fraught with complex tax and corporate requirements as well. And in the end, it would get Seagate shareholders no closer to the original goal, which is owning Veritas stock.

In any case, Congress has tightened the law here. ``It's a very complex area of the law to begin with, which is why most companies will typically go for a ruling request, to get the IRS to bless it first,' says John Murphy, a senior tax partner with Deloitte & Touche.

C) Seagate should sell itself to Veritas. This is the kind of answer that the message-board crowd loves: In one fell stroke, the dilemma would be solved, and Seagate shareholders would receive Veritas stock. My reaction: Sure, and pigs can fly. There's no reason why a new-world company like Veritas would want an old-line company like Seagate.

D) Seagate should sell the disk-drive business and concentrate on being a venture capital holding company, a la CMGI. OK, this is a frivolous answer that would mean abandoning the company's central mission. And it wouldn't solve the immediate Veritas problem. But Luczo has obviously demonstrated his credentials as an investor. It pays better than disk drives.

E) Seagate should slowly sell its Veritas stake and use the money to repurchase its own shares. As unsexy as this answer is, it's probably the most likely one. Yes, Seagate would face a tax bite as it liquidated its Veritas stock. But the shareholders might get a benefit. The downside: The market has not reacted particularly well to stock buy-backs lately.

If you've got a better answer, you should try to reach Luczo at Seagate's Scott's Valley headquarters (www.seagate.com). There might be a very handsome reward for anyone who figures out the answer.




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Scott Herhold's Stocks.comment appears every Monday and Thursday. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail sherhold@sjmercury.com; phone (408) 920-5877. To read the columns online, see www.siliconvalley.com/columns/stockscomment/
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