Question one
In following the LBO, the assets of Seagate’s will be $128.1 million shares of the stock of Veritas. The management believed that Seagate’s value should be ascribed to its operating assets value. Because the market was attributing high value to the stake of Veritas, the market made it appear as if Seagate was asset holding firm (Andrade et al., 2001 p. 13). Going concern model may be used in evaluating the operating expenses of a company. This model assumes that the business will continue operating for an undefined amount of time (Pignataro, 2013 p. 73). Another model that can be used to value the operating assets of Seagate in Veritas is Discounted Abnormal Operating Earnings valuation model. The models make an assumption by modeling the book equity as a ration to the firms' revenues. The objective of this valuation model is valuing the earnings power and capability of generating cash making up the operating enterprise (Damodaran, 2012 p 34). Furthermore, the discounted cash flow model can be used to evaluate the Seagate's investment in Veritas. The assumption of the model is that it considers the time value of money. It assumes that a dollar is worth more tomorrow than today.
Question two
Different valuations are used in the two cases. In the first instance, the FCFF valuation model is used. The reason is that the company is planning to control its constant percentage value. This model is used in the firms that desire to maintain their debt level, which can further finance their capital expenditure (Larrabee & Voss, 2013 p. 63). In the second case, discounted cash flow valuation model is used. In this case, the buyout plans to pay the dividends until a terminal debt value is reached. The two scenarios are different and thus they have various models of valuation. Furthermore, it reflects on the riskiness of the company’s cash flows (Viebig et al., 2008 p. 32). Therefore, in the first case, the firm wishes to maintain its debt while in the second case, the firm wants to pay down its debts until a terminal debt level of $700 million is attained.
References
Andrade, G.M., Gilson, S.C. and Pulvino, T.C., 2001. Seagate Technology Buyout.
Damodaran, A. 2012. Investment valuation: tools and techniques for determining the value of any asset. Hoboken, N.J., Wiley.
Larrabee, D. T., & Voss, J. A. 2013. Valuation techniques discounted cash flow, earnings quality, measures of value added, and real options. Hoboken, New Jersey, John Wiley & Sons, Inc.
Pignataro, P. 2013. Financial modeling and valuation: a practical guide to investment banking and private equity.
Viebig, J., Varmaz, A., & Poddig, T. 2008. Equity valuation models from leading investment banks. Chichester, England, John Wiley & Sons.
