And so it ends. Seagate Technology (Nasdaq: STX ) has called it quits. The buyout talks with TPG Capital have fallen through. And, yes, I suppose you could call it "bad news." Investors certainly think so, selling the stock off hard in afterhours trading yesterday. But I disagree.
On Monday, Seagate confirmed that TPG Capital had been unable to find enough partners to go in with it on a deal to take the company private. Hence, "management and the board have chosen to cease discussions." But don't think for a minute that means no one wants to buy Seagate. If private equity won't step up to the plate, says Seagate, it'll just go ahead and buy itself.
Citing the cheapness of debt these days, along with its own "improving business conditions," which enable Seagate to generate copious free cash flow, management promised last night to initiate a $2 billion share repurchase plan -- essentially buying when Wall Street won't. That's exactly the right call to make, and investors who dumped the shares last night on fears their "acquisition premium" just blew up were exactly wrong to be selling. Here's why.
A bargain is still a bargain
Hard-disk-drive makers like Seagate and Western Digital (NYSE: WDC ) have been doing their part to reduce unemployment in America lately, giving a huge boost to the epitaph-writing industry. To hear pundits tell it, Apple's iPad and the host of wannabe pads issuing from the likes of Samsung and Cisco mark a sea change in the computer industry. Henceforth, the growth companies are Flash mnemonics Micron (Nasdaq: MU ) , SanDisk (Nasdaq: SNDK ) , Smart Modular (Nasdaq: SMOD ) , and STEC (Nasdaq: STEC ) . There's no love left for Seagate.
Except, if that were true, why was TPG trying to buy Seagate in the first place? Why did Silver Lake try to buy it before them? The answer is this: Seagate stock is screamingly cheap.
Selling for less than 4.5 times its past year's profit, Seagate stock is priced to move even if the company misses Wall Street's consensus long-term growth estimate of 10%. To believe today's price is anywhere near "fair value" requires that you assume Seagate will miss that estimate by half. And call me an optimist, but even I don't think Wall Street is off by that much.
Even if prospects look better for Flash and solid-state drives than for HDDs, there's still room in this world for both. There's still a case to be made for Seagate, and the more the stock slides, the stronger that case becomes.