Seagate: Why it makes sense to go private now

Seagate is pondering to move to go private again and the timing makes a lot of sense given the hard drive market could face a wrenching change amid the popularity of tablets.

Seagate is pondering to move to go private again and the timing makes a lot of sense given the hard drive market could face a wrenching change amid the popularity of tablets.

In a short statement, Seagate confirmed reports that it may go private. The company said "it has received a preliminary indication of interest regarding a going private transaction." Bloomberg reported that TPG and KKR were the parties interested in buying out Seagate.

In 2000, Seagate went private right before the tech bust in a complicated deal valued at $20 billion. Going private allowed Seagate to ride out the storm out of public view.

This time, a Seagate deal would also illustrate some good timing. Why? Seagate is heavily tied to the PC market and disk drives. PC sales are slowing as new form factors like tablets pick up. The problem: Tablets don't use hard drives.

Barclays Capital analyst Ben Reitzes highlights the rationale behind Seagate's desire to go private.

We believe that the HDD business faces secular issues that are changing daily. Tablets and smartphone devices that don’t use HDD’s seem to be cannibalizing the PC market at a more rapid clip than expected. While the rise of the netbook in 2008 was just a scare, this tablet issue may be reality. As a result, we find it very difficult to have confidence in forecasts for even a few quarters, much less a few years.

Reitzes reckons that Seagate is better positioned than Western Digital. Reitzes adds:

In terms of outlook, we still believe that Seagate is better positioned than Western Digital to absorb some of the PC-related weakness or cannibalization to notebooks from NAND-based tablets due to its strength in the enterprise (14% of total unit shipments for Seagate) which carries higher prices than desktop or mobile drives.

Nevertheless, Seagate has a tricky turn to navigate ahead. History indicates that when the going gets tough, Seagate goes private.

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