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July 15, 1998

SEAGATE TECHNOLOGY CONSIDERS SOFTWARE ARM IPO

By CBR Staff Writer

Seagate Technology Inc, which finished off a bad year with a better quarter on Tuesday but still posted a $530m net loss for the year on falling revenues (CI No 3,452), is considering spinning off its Seagate Software arm. We’re preparing to take the company public, the company’s president and CEO Steve Luczo told The San Jose Mercury after the earnings announcement, though he apparently wouldn’t be drawn over the timescales beyond saying that it should be within a year. Luczo’s rationale, it appears, is that the potential value of Seagate Software is being hidden within the hardware company, which has a current market value standing at just below last year’s sales of $6.8bn. The software arm contributed just $79m to Seagate’s total of $1.6bn in revenues for the quarter, and sales were disappointingly flat, due apparently to one-off tactical issues. But high margins on storage management software products in the region of 86% dragged Seagate’s overall gross margins up 3.5% from what would have been 15.4% to 18.9%. Given the kind of market valuations evident elsewhere in the software industry, an independent Seagate Software could find itself with a valuation as high as $4bn. Seagate Founder Al Shugart set a goal of creating a $1bn software-specific company by the end of 1999 when he began building up Seagate Software in May 1994, with the acquisition of Canadian company Crystal, followed by Palindrome Corp and Holistic Systems Inc over the following year. The acquisitions are still coming: in May Seagate acquired Kodak division Eastman Software Inc’s hierarchical storage management software in a $10m cash deal, (CI No 3,425), for which the parent company took a $7m charge during the quarter.

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