Investors will be sure to tune into the much-ballyhooed spectacle of a technology IPO Wednesday, with the advent of a nearly $1 billion deal from disk drive maker Seagate. But it was clear late Tuesday that the enthusiasm apparent in the company's road show had ebbed, with the deal pricing below expectations. Seagate, which will trade under the ticker STX, had planned to offer 72.5 million shares at a price of between $13 and $15 per share. However, a source at one of the underwriters said late Tuesday that the deal had priced at only $12 a share, following concern that the deal could come in as low as $11 per share. "Nobody is going to stick their neck out and try and look tough-macho and risk capital losses in this market," said the source, referring to the fact that the underwriters were unlikely to have used their own capital to prop up the deal to support a higher price. Investors are in "show-me mode," says William Smith, president of Renaissance Capital, an independent research firm in Greenwich, Conn., alluding to the low pricing. "This is an industry that in the past has had a very storied history of imploding on itself." Another concern: After being taken private for $1.8 billion in 2000, Seagate's market value now stands at close to $6.8 billion. "That's a lot of increase in value," says Smith. Still, he gives Seagate credit for gaining share and staying profitable in a tough period. Seagate's return to the public market comes after it was taken private in 2000 by a group of investors headed by Silver Lake Partners. Boosters have talked up the turnaround story for both the company and the tough industry it operates in. In its prospectus, Seagate says it's gained new momentum in profits after a few rough years in the late '90s. Since 1998, it's embarked on a tough restructuring campaign, closing 14 facilities and halving its staff with a punishing layoff of 40,000 employees. At the same time Seagate has undertaken a makeover, the dynamics for its industry have improved in the wake of major consolidation. As recently as three years ago, five players jostled for space in the disk drive business, leading to aggressive pricing that socked profits. Since then, two companies have dropped out, with Fujitsu exiting the business and IBM ( IBM) selling its interests to Hitachi.
That leaves three players with an estimated 85% market share in the desktop arena, a trend that's helped ease pricing pressure, says Christian Schwab, an analyst at Craig-Hallum Capital, an investment research boutique. "What was interesting to me was that the industry seems to have undergone some positive change in the form of consolidation in the last few years," says fund manager Dan Prislin of the Transamerica ( TPVIX) Premier Core Equity fund , who attended Seagate's road show. "It seems like over time it's been hugely cyclical and very tough to make profits at times. But with consolidation and the top few players having much more market share, it potentially could be a more rational environment. At least, there's a case to be made." Seagate enjoys the biggest chunk of share in the desktop space, with about 35% of the market. The company pulls in an estimated 20% of total revenue from Hewlett-Packard ( HPQ). Even better, it accounts for a hefty 52% of sales in the enterprise arena, which claims margins at least double those in the desktop space. For the most recent fiscal year ending in June, Seagate generated net income of $153 million on revenue of $6 billion. But it's hardly in a fast-growth industry. Schwab estimates desktop disk drives will post sustainable growth of 6% to 8% over time. He says Seagate's IPO is a healthy marker for the disk drive business, which has been saddled with a reputation for volatility and, especially prior to consolidation, cutthroat commodity pricing. "The fact that the largest and most profitable company is back in the market and becoming a public company again will bring greater attention to the space and to other companies involved," says Schwab, pointing to rivals, such as Maxtor ( MXO) and Western Digital ( WDC), as well as component suppliers, such as Hutchinson Technology ( HTCH).
But that level of attention is less appealing to fund managers. Prislin notes that Seagate's crowded road show may be an indication that investors still are too upbeat about technology. "It was standing room only, which surprised me. Not being a big tech investor, I would have thought there wouldn't be quite the clamoring I saw at this juncture. That's not a real positive sign for me." Of course, given that the deal later priced below expectations, investors may be more cautious than they appear. In any case, Prislin doesn't plan to buy IPO shares, but says he'll do more research on the company.