Veritas' eye-opening deal
IN THE EIGHTH-LARGEST acquisition in Silicon Valley history, little-known Veritas Software moved into the fast lane by purchasing one unit of a Seagate Technology subsidiary for $1.6 billion.
BY MIGUEL HELFT
Mercury News Staff Writer
A new software powerhouse was born Monday in Silicon Valley.
Veritas Software Corp., a little-known maker of programs to manage data storage systems, agreed to acquire a portion of Seagate Software Inc., a subsidiary of disk-drive giant Seagate Technology Inc., for about $1.6 billion in stock. Veritas will issue 33 million shares for the Network and Storage Management Group, one of Seagate Software's two units.
The deal is the eighth-largest acquisition in Silicon Valley history and represents the most ever paid in the valley for a software company.
Following the deal, Seagate will own 35 percent of Mountain View-based Veritas, which is expected to have about 2,300 workers by the time the transaction is complete. The companies had combined sales of about $300 million in the past 12 months, a figure that analysts said is likely to grow 50 percent within a year. Seagate will name two new directors to the board of Veritas, and the two companies will integrate many of their technologies and market products jointly.
Both Seagate Software and Veritas make programs for recovering data and managing storage systems on computer networks. Their customers tend to be large corporations with vast networks of computers and disk drives. But while Veritas products work primarily with Unix-based computers, Seagate Software has sold its products to companies with computers running Microsoft's Windows NT software. The new company will provide a complete line of products for the growing number of companies that have both kinds of computer systems.
"In a nutshell, what we are trying to do with the new Veritas is to combine the Unix space with the (Windows) NT space," said Terry Cunningham, current president and chief operating officer of Seagate Software. Cunningham, who is slated to become president and chief operating officer of Veritas, said the two companies were on a collision course, as each one was trying to enter the other's market.
For Seagate, the deal represents a previously hinted shift in direction. Stephen Luczo, who became Seagate's chief executive in July following the ouster of longtime CEO Al Shugart, had indicated he was planning to carve out portions of Seagate Software, the subsidiary he was largely responsible for building.
"It is a little ironic that the man who was hired to preside over the Seagate (Software) buildup was the man to sell it," said Jim Porter, president of market research firm Disk/Trends Inc. "What we are seeing is a change in strategic direction as management has changed."
Yet, the spinoff appears to make sense. While Seagate's software sales were growing rapidly, the company's stock price has been pummeled as its core disk drive business faltered. As of Monday, Seagate was valued at $5.6 billion, below its 1998 revenues of $6.8 billion. In contrast, the deal landed the company $1.6 billion in stock for its Network and Storage Management Group, a unit that generated $175 million in sales in the past 12 months.
"We always said we would drive for some liquidity," Luczo said. "This does it. We are excited about the company that is being created and to get that kind of value for a piece of what we've been working on for four years."
Luczo said he still was considering options for the remaining portions of Seagate Software.
Analysts said the deal would give Veritas an edge against its competitors, which include IBM, Computer Associates Inc. and Palo Alto-based Legato Systems Inc. But they also raised questions about the size of the deal.
"I'm a little cautious by the near-term prospects, given the size of the merger and the work necessary to execute (it) flawlessly," said Wendell Laidley, an analyst with Credit Suisse First Boston. "Longer term, I think it is a terrific combination given that it extends Veritas market toward the low end."
Laidley said the price Veritas paid, nearly nine times the Network and Storage Management Group's revenues, was not cheap.
Cunningham said he did not expect the deal would lead to any layoffs, but said specific plans for integrating the workers in Scotts Valley and Mountain View have not be laid out.
The announcement came after the close of stock markets in the United States. Veritas shares fell $2.88 to $45.38 and Seagate fell $1.44 to $23 amid a general decline in technology stocks. Shares of Veritas have fallen more than $10 in the past five days, in very heavy trading. On Friday, trading in Veritas was unusually heavy as 3.7 million shares changed hands, nearly six times its average trading volume.
Over the past year, shares of fast-growing Veritas have climbed sharply as corporations have been snapping up its software. The company has been using its increased share value to make acquisitions.
Veritas Chief Executive Mark Leslie will remain as chairman and chief executive of the combined company. Luczo and Greg Kerfoot, chief strategic officer of Seagate Software, will join Veritas' board.
Seagate said it will recognize a one-time gain of about $850 million, and a one-time write off of $120 million.
The transaction is subject to shareholder approval, and is expected to be completed by January 1999. |
