M&A Impact: Seagate Software Still Plans to Break Free

Computergram International, May 24, 1999

In 1994, Al Shugart, the founder and former CEO of Seagate Technology, set an objective for his market-leading disk drive company. By the end of 1999, he wanted Seagate to be a diversified, $10bn IT company with software revenues that totaled $1bn. But that was five years ago and subsequent events have made the company rescale both its hardware and software ambitions.

First, Seagate Technology is unlikely to reach its double digit billion dollar ambition, the price erosion in the disk drive business has put paid to that. For its last full year to June 30 1998, Seagate's disk drive business shrunk by a quarter to $6.82bn on losses that deepened to $530m.

In fact, Seagate Software is less than half of the size it was a year ago, and even then it only reached an estimated $325m in revenues for calendar 1998. And the newly trimmed software operation was less than half that size for the same period. It emerged as roughly a $125.9m business in 1998, once NSMG (the network systems management group), primarily an NT-based network back-up operation now in the process of being bought by Veritas, was removed from the equation.

Furthermore, Shugart has left the company leaving his intentions for the company he created and partly destroyed, some would argue, with new president and CEO, Steve Luczo. Luczo has kept one of Shugart's plans alive. He still hopes to take the much diminished Seagate Software to IPO.

The imminent completion of the Veritas/NSMG deal, which is now scheduled to close on May 27, has sparked speculation that a public flotation of remaining IMG (Information Management Group) is not far off. The company has already filed the relevant papers to the SEC - that was carried out a year ago - so the application is lodged with the relevant regulatory body. To achieve approval, Seagate will need to revise the IPO prospectus by taking out any NSMG revenues and projections, say analysts.

The delay in pushing through IPO plans was due to the NSMG sale taking longer to close than originally anticipated, according to company executives. Where three months tend to be the customary time period in which a deal is signed, sealed and delivered, the Veritas/NSMG transaction will have taken over double that time. Any plans to take IMG public have been hamstrung as a result.

The rationale behind an IPO is that Seagate Software will be able to realize its true market value which is currently being obscured by its parent company's current $7.8bn market cap. As a public company it will also be able to make acquisitions and improve employee retention rates by offering stock in the public traded company. But IPO plans have nothing to do with a need to raise cash, company executives assured us.

Furthermore, the timing is particularly apposite right now. The conclusion of the deal with Veritas has enabled Seagate Technology to rid itself of some of the loss-burden associated with Seagate Software. During its five years, the software company has rung up aggregate losses of $285.6m, mostly related to acquisition costs. But a substantial portion of those losses have now presumably been off-loaded since Seagate Software now claims to be in profit.

The software division's revenue are now solely focused around business intelligence tools with the Crystal Reports client-based query and reporting tool, the Holos on-line analytical processing package and a server-based information architecture that underpins those two known as Crystal Info. These products form the mainstay of the operation's business.

In terms of size, the business is growing at a reasonable clip with estimated revenues up 30% to $125.9m for calendar 1998. For the coming quarter Seagate Software is on track to achieve revenues that will be roughly comparable to rival, Business Objects, according to company executives.

It will take a few months following the completion of the demerger before Seagate Software is able to shape itself up as a hot IPO prospect and, in so doing, avoid a Brio-style IPO failure. "Seagate will need to invest in some heavy marketing for IMG once the demerger is complete, to try and build up the profile and growth rate of the remaining business. An IPO would then make more sense," says OLAP analyst, Nigel Pendse.