Four Questions for the Seagate Board

Subject: Severance Pay for Mr. Watkins.

To the Board of Directors of Seagate (STX):

I have been a professional fund manager for 20 years and a Seagate Shareholder for close to a decade. I cannot remember when I have been as aghast as when I read the financial disclosure below:

On February 4, 2009, the Company and Mr. Watkins entered into a separation of employment and release agreement (the “Separation Agreement”) pursuant to which Mr. Watkins will cease employment with the Company effective immediately. As consideration for entering into the Separation Agreement as well as a separate restrictive covenants agreement (described below), Mr. Watkins will receive benefits consistent with the Company’s obligations to Mr. Watkins under Seagate’s Executive Officer Severance and Change in Control (CIC) Plan. The benefits consist of cash payments totaling $5,000,008, which equals the sum of 24 months of his annual salary and two times his target annual bonus level for the Company’s prior fiscal year, in two equal installments: one installment of $2,500,004, payable on or before February 26, 2009, and a second installment of $2,500,004 payable within 10 business days of December 2, 2009. In addition, the Separation Agreement provides for a separate lump sum cash payment of $29,944, payable on or before February 26, 2009, which payment is intended to help defray Mr. Watkins’s costs of obtaining continued health insurance coverage pursuant to COBRA.

Mr. Watkins will also, until June 30, 2009, be eligible to undergo a physical examination at the Mayo Clinic in Rochester, MN, pursuant to the terms of Seagate’s Executive Compensation and Benefits Policy, and to receive reimbursement for reasonable travel and lodging expenses incurred in connection with the examination.

The payments described above are contingent upon Mr. Watkins’s compliance with the terms of both the Separation Agreement and the restrictive covenants agreement also entered into between the Company and Mr. Watkins on February 4, 2009, which restrictive covenants agreement precludes Mr. Watkins from actions which include: (i) accepting employment with a Seagate competitor; (ii) soliciting business from Seagate customers; and/or (iii) soliciting Seagate employees for alternative employment, in each case, for a period commencing on the effective date of the agreement and ending on December 2, 2009.

I would like the board to address the following points of concern:

• The issue of Mr Watkins lack of performance is unambiguous: the share price performance (vs. WDC); the loss in HDD market share; the write-down of Maxtor’s entire purchase price of $1.9 bn to zero, the acquisition he presided over and implemented. If this is in doubt, I would like a clarification.

• What is the principle underlying your remuneration policy? I believe a basic tenet would be to reward merit and penalise incompetence. Why does the Executive Officer Severance Policy not show even the slightest reference to the basic principle?
• I understand there has been a blanket 10% pay cut for all employees. Does the board have any inkling how this severance payout rankles investors and employees alike? Have they considered the effect on morale of existing STX staff? I suggest they read some of the comments on the Barron’s website, from employees that have risked being exposed as ‘disloyal workers’ to voice their indignation.
• On the issue of restrictive covenants that hinge on the severance package, does the board feel $5 m is a good price to prevent Watkins walking to a competitor? After his record? Does the board feel he has the clout to attract competent staff away? After his tenure, are these ‘Watkins-loyal’ employees worth keeping? Has the board noticed the unemployment statistics, the number of companies in distress, the number of highly qualified executives looking for a job? I suggest the board seriously reflect on these issues before they face a shareholder revolt.

I look forward, eagerly, to your prompt response.

A very concerned, and hitherto faithful Seagate investor,

Sunil Shah

Disclosure: Long position in Seagate.

Comments

[Toad Fitzpa...:]

Dump STX, buy WDC its managed by pro's - look at their ROE

Feb 11 02:37 PM

[The Watchfu...:]

Great unique post.

Question though: Is Watkins leaving Seagate necessarily? Or moving to another role? Sources have stated that Luczo and Watkins would discuss about other possible roles. Would the separation agreement still hold validity if a conclusion could not be met? Interesting to note.

Apr 14 03:36 PM