Silver Lake Leads $2B Seagate Buyout –

Money is flowing like water these days at Silver Lake Partners LLC. The technology buyout group inked two deals in the past several weeks, bringing its $2.3 billion debut fund to approximately 50% committed.

Earlier this month, Silver Lake announced that it will lead a private equity investment group in the acquisition of computer disk drive maker Seagate Technologies Inc. The complex going-private transaction is valued at approximately $2 billion.

And in a separate deal, Silver Lake last month agreed to invest $300 million in research firm Gartner Group Inc.

Joining Silver Lake in the Seagate deal are Texas Pacific Group, Chase Capital Partners and venture capital firms August Capital and Integral Capital Partners. Seagate management also will have a stake in the deal.

Partners at Silver Lake declined to give financial details of the transaction, but Glenn Hutchins, a founding partner at the firm, said the total equity contribution will be approximately $1 billion, with Silver Lake and Texas Pacific making the largest commitments.

Although Hutchins declined to discuss what form the deal’s debt financing will take, Chase Manhattan Corp. and Goldman, Sachs & Co. reportedly are arranging approximately $1.3 billion in high-yield debt.

The transaction also calls for Seagate to divest itself of its one-third ownership of Veritas Software Corp., worth about $18 billion. Veritas Software, which makes software to manage data storage, will buy back these shares from Seagate. In the past year, Seagate’s minority holding of Veritas Software grew more valuable than Seagate’s entire market capitalization.

The Old New Thing

Silver Lake originated the Seagate transaction, and Hutchins said the deal comes closest to fulfilling his firm’s original investment mandate namely, to look for undervalued, mature companies in the technology sector. “This was precisely the sort of deal that we built our team to do,” he says.

While Seagate manufactures and supplies data storage equipment to all the big players in the new economy, its share price has not been driven as high as those of other tech companies. At press time, shares of Seagate were trading at a comparatively paltry price-to-earnings ratio of 15. Hutchins said his firm is betting that demand for storage space will increase as traffic over the Internet continues to expand. Partners at Silver Lake hope this trend will fuel demand for Seagate’s products.

Hutchins also said the disk drive business is difficult because it requires high research and development costs, as well as high capital expenditures. He described the business as volatile and cyclical. Because of this, Silver Lake decided to bring Texas Pacific into the investment group. Hutchins said the Texas firm has experience with difficult industries, having invested successfully in the airline and semiconductor industries, both of which are notoriously cyclical. In addition, Hutchins is personal friends with Texas Pacific founder David Bonderman.

The connections don’t stop there. Silver Lake founding partner Roger McNamee is also a partner at affiliated VC firm, Integral Capital. Another partner at Silver Lake, Jim Davidson, has extensive connections within the disk drive industry, having covered the sector while an investment banker at Hambrecht & Quist.

Hutchins said Seagate, as a private company, will invest further in research and development. Silver Lake as yet has no exit plans for the company.

Gartner Group Deal

Last month, Silver Lake agreed to invest $300 million in publicly traded Gartner Group, a company that sells research to the information technology industry. Its customers include chief technology officers and chief information officers of IT companies. Hutchins would not disclose what percentage of the company Silver Lake will end up owning. Gartner Group has a market capitalization of $1.4 billion.

Late last year, Silver Lake did its first deal a $75 million investment in Submitorder.com. The company outsources order fulfillment for e-commerce companies.

Should the Gartner and Seagate deals close, they will bring Silver Lake’s buyout fund to half invested. The group rounded up $2.3 billion from limited partners last year after only five weeks of active marketing. Silver Lake as yet has no plans to raise a follow-up fund. “I haven’t had the time or the interest to think about that,” Hutchins said.