How Seagate Got Its Groove Back

Going private freed the disk-drive maker from Wall Street's unrelenting demands. Now retooled, profitable, and boasting a 56% market share, it may be ready to go public again

In early 2000, something seemed out of whack to Stephen J. Luczo, CEO of leading computer disk-drive maker Seagate Technology Inc. Sure, the company was losing money, but its $15 billion market value didn't make sense: It was actually $3 billion less than Seagate's 33% share of hot software maker Veritas Software Corp. (VRTS ), whose sales were just 10% of Seagate's $6 billion. So Luczo tapped two investment firms to help engineer an elaborate deal with Veritas that cashed out that stake for shareholders, sold off ancillary units, and took the stripped-down Seagate private.

The result: Seagate executives could now ignore Wall Street's relentless demands for quarterly earnings and turn their full focus to stepping up a manufacturing revamp it began two years before.

Today, Seagate is back in fighting trim. And it's old-fashioned management that did the trick. Luczo and his team in Scotts Valley, Calif., remade the 23-year-old company's manufacturing processes and streamlined its supply chain, so it's churning out more drives at less cost. Although sales were down 2%, to $5 billion, because of the tech downturn, the company chalked up a profit of $352 million for the first nine months of its fiscal year, which ends on June 30. That will help reverse a loss of $522 million in 2001.

Moreover, Seagate widened its market-share lead over competitors to a commanding 56%, from 47% last year, according to research firm Trend Focus. Even its rivals are impressed. "They're well-focused and have made a lot of progress," says Michael Cannon, CEO of Maxtor Corp. (MXO ) in Milpitas, Calif.

Indeed, thanks to the turnaround, analysts say Seagate is now weighing a return to the public market later this year. Luczo declined to discuss the company, citing potential objections from the Securities & Exchange Commission. But analysts think the offering could value the streamlined Seagate as high as $10 billion. That almost certainly will be the year's largest tech public offering.

Seagate may well need the money. Making disk drives is a brutal business, with ever-shortening product cycles and thinning margins. Year after year, drive makers must pump in cash to make faster, smaller drives that store much more data but sell for less money. "You can't fall off the trend in research and development or you'll fall out of the market," says James N. Porter, president of Disk/Trend Inc., a market researcher. The number of companies that sell drives directly to computer makers is down from 75 in the late 1980s to four today: Seagate, Maxtor, and Japan's Fujitsu (FJTSY ) and Hitachi (HIT ), which recently agreed to buy IBM's drive unit.

It hasn't been easy staying on that list, and it won't get any easier. Seagate now spends about $650 million a year on product development, a 65% jump from 1997, the year before Luczo began rethinking operations. Analysts say it'll have to keep up that pace. Seagate has shut half its overseas factories and slashed 60,000 jobs, cutting costs by 37%, or $2 billion, since 1997. And in 1998, it spent $30 million on a new research center to scope out opportunities years into the future. One result: Last year, after Maxtor pioneered a disk-drive market for consumer electronics gear such as MP3 players and video-game machines, Seagate jumped in. Now it supplies drives for Microsoft Corp.'s Xbox game player.

Much of the credit for the changes goes to Luczo and William D. Watkins, Seagate's chief operating officer. In mid-1998, Seagate's supply chain was clogged with too many parts because its 21 disk-drive models shared few components. Even the screws holding the same things together were different. And some customers complained that Seagate didn't listen very well to what they wanted.

Out went founder and CEO Alan F. Shugart and other top execs, and Luczo and Watkins got busy. They introduced a quality-improvement program to cut costs. They revamped manufacturing plants so they were flexible enough to adjust easily to changes in demand and new technology. And they cut the number of parts used to make different drives, while paying suppliers to get parts to them faster. "They've really homed in on drive manufacturing and not gotten distracted by other ventures," says David Reinsel, a research manager at market researcher IDC.

Customers seem to like the new Seagate. Dave Craig, a supply manager for storage giant EMC Corp. (EMC ), says Seagate has been more attentive in the past year. Craig, whose company is Seagate's second-largest customer after Hewlett-Packard Co. (HPQ ), says senior managers from EMC and Seagate now meet for quarterly planning sessions that Luczo often attends. "Steve is much more involved in the day-to-day operation," says Craig. "He has been very positive for that organization." And for EMC: Seagate has shaved months off the time it takes to make the drives, speeding EMC's time to market.

Hard work aside, Luczo also had some luck. Maxtor got bogged down in a merger when it bought Quantum Corp. last year, then ran into delays with new drives. IBM has suffered with quality problems, which helped drop its market share to 10% in the first quarter of 2002, from 23% in 2001. "Since going private, Seagate has had all the chips fall their way," says IDC's Reinsel.

So why return to the public market if things have worked out so well in the shadows? For one, Seagate's private investors and top executives stand to gain handsomely from the deal. Silver Lake Partners and the Texas Pacific Group, which together own 65% of Seagate, picked up the core drive operation for $2 billion in 2000, or one-fifth of Seagate's expected market value after the public offering. Luczo's 3.5% stake would be worth about $350 million.

Mainly, though, going public will give Seagate quicker access to capital. That will be key as customers, always wary of one supplier who's dominant, think about hedging their bets by buying from competitors. As long as Seagate can afford what it takes to stay on that technology treadmill, the customers likely will keep coming back.

By Faith Keenan in Boston

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