1. We can examine the stock prices of Seagate and Veritas on Exhibits 3 and 5. Exhibit 3
shows us that Seagate had a stock price of 64.25$/share on March 10th 2000. Veritas stock
price is disclosed on Exhibit 5 with 168.69$/share at that date, which is an increase in
value of more than 200% within the last six months (Exchibit4). Moreover, we can assert
that the pre-tax value of Veritas stake, which is held by Seagate, has notably exceeded
Seagate’s market capitalization from November 1999 onwards. This is the result of selling
Seagate’s Network & Storage Management Group (NSMG) to Veritas for 155 million
shares of Veritas stock. Seagate became the largest stockholder of Veritas with an
ownership over 40% through this transaction. Since, Seagate’s stock price is tied to
Veritas’ stock price after the transaction, I would assume that Veritas is overvalued or
Seagate is undervalued. To exploit that value gap, you could for instance short sell Veritas
shares and wait till the value of the shares decrease. The value gap should become smaller,
if every MBA student took this position.
2. There are many reasons why Seagate is priced low. The disk drive market is highly
volatile and experienced declining revenues through fierce competition in the past. Despite
Seagate’s market-leading position and its large size, the market was not valuing its disk
drive business as expected. In contrast, Veritas is operating within another industry where
significant growth was assumed. Although Veritas is a smaller company, the market
evaluated its stock with a much higher price. Since the market value of a company is rather
