The market has been driven by "momentum investing", in which buyers chase fashionable stocks, says Steve Luczo of Seagate in an interview by Andrew Fisher

As a former investment banker, Steve Luczo is no stranger to the rough and tumble of Wall Street. But as chief executive of Seagate, the world's leading disk drive manufacturer, he is happy to be moving the company away from the Street's probing eyes and relentless focus.

In a complex $20bn buy-out deal, announced at the end of March, Seagate is becoming a private company. Veritas, a data storage software company, will buy Seagate (and the 33 per cent stake it holds in Veritas) and then sell the disk drive business to private investors for $2bn, much less than the value put on it by analysts. The investors include private equity fund Silver Lake Partners and Seagate management.

r Luczo says that by extricating itself from the need to deliver constantly improving quarterly figures to hard-bitten and demanding analysts, California-based Seagate will be able to concentrate on longer-term horizons.

In their recent infatuation with dotcom and so-called "new economy" stocks, many investors institutional and private have neglected the vital technology sector, he believes.

This comprises companies such as Seagate which produce and build products and components vital to the running of computers, IT networks and internet operations.

r Luczo was speaking as high-tech stocks were falling in the US and around the world, but before the big collapse of Friday, April 14 which shook investors severely.

Ahead of the stock market fall-out, Seagate had actually been valued at less than the $20bn market worth of its Veritas stake.

In a comment bound to prompt disagreement among many analysts, the ebullient Mr Luczo - an investment banker for 10 years, latterly with Bear Stearns - says: "The Street has not done as good a job as it could on fundamental analysis." Instead, the market has been driven by momentum investing, in which buyers chase fashionable stocks.

"And what happens when you're driven by momentum investing is that you have lots of companies that, because they're not in the 'hot sector' as deemed by the momentum, get under-valued and ignored."

While managements have obligations to shareholders, they also need to pay attention to the needs of employees, customers and suppliers. "You need to make sure that you're positioning the company for long-term viability to deliver to all your constituencies. And to the extent that one of those constituencies [as expressed through the stock market] is inhibiting your ability to do that, it needs to be addressed."

Nor does he feel the turnaround in share prices from dizzying heights to stomach-churning falls means Wall Street has come to its collective senses.

"I don't think it's turning the other way because people have done any fundamental analysis. I think it's turning the other way because the momentum has just shifted the opposite way.

"It's still the same momentum; it's just momentum moving in the opposite direction. The momentum was "buy anything with 'dotcom'" and now the momentum is "sell anything with 'dotcom'". That's crazy, too."

Not all internet companies are based on shaky business models, however. And the advances of e-business and e-commerce in the corporate and retail markets are certainly more than an investment mirage.

"I am not a subscriber to the view that 'all internet companies are over-valued'. Absolutely not. I think what's going on with the web is that we are transforming the world economies."

Companies which exploit opportunities in the value chain between manufacturers and users stand to become highly successful.

"The net impact of that is definitely beneficial," he adds. "But does that mean that every company with a 'dotcom' after it, that has a web site, is worth $5bn? Clearly not. And it doesn't mean that every company that doesn't sell itself that way is worth zero."

Seagate itself founded in 1979 by Alan Shugart, a key member of the IBM team that produced the first disk drive - is becoming more aggressive in putting its business processes, logistics and buying and selling activities on the web. "Every major company is heading down this path."

Now the company is freeing itself from what Mr Luczo sees as the constraints of the stock market - the deal should be completed in the third quarter of this year - what will it be able to do that it could not before? In the last fiscal year, capital and R&D investments totalled around $1.2bn. Revenues were $6.8bn.

He says some types of investments, where the projected payback is some years off, could now be pursued more aggressively. "The most obvious would be new product strategies related to market opportunities. So whether or not that's a new type of storage device for commercial computing or for the consumer market, that people think is going to be significant in two to three years, there are opportunities which Seagate could pursue."

He gives an example. "Let's say I said 'I'd really like to spend $30m more to develop some sort of storage device that we thought would be very effective for the consumer marketplace'. And say that revenue opportunity is a $1bn one. Well, if I went to the Street and said 'whatever you have projected for us to make next year is going to be decreased by 15 or 20 per cent because we're making this long-term investment in R&D', you know what the reaction would be? 'Seagate's going to miss its numbers' - and the stock is down maybe 40 per cent - and yet you're doing the right thing for the company."

The "right thing" in Seagate's view is to defend and expand its position in a market doubling every nine months. By 2002, the worldwide storage market is expected to be worth some $100bn, with traditional IT customers being supplemented by those on the consumer side as storage applications are developed for home networks, cars, entertainment devices and home appliances.

He believes private companies, especially start-ups, have the advantage over public companies in being able to search out promising opportunities and act fast. Now, Seagate can also become more flexible.

As well as the consumer market, Mr Luczo says it is eyeing new network-based storage architectures for the internet computing age.

He describes the disk drive business as "the extreme sport of technology". Everything it does stretches the limits of activity - "short product life-cycles, extremely high R&D, extremely high capital needs, a small customer set which obviously makes it a very price-intensive market, a number of capable competitors and then extremely high-volume manufacturing of clearly the most technically complex device that goes into a computing architecture".

The "phenomenally challenging competitive environment" is one reason the stock market is not especially enamoured of storage companies. The sector is capital-intensive with tiny profit margins and steadily falling prices. There is also too much capacity.

r Luczo sees IBM as "still the most significant dangerous long-term competitor". Other rivals such as Fujitsu, Quantum, Maxtor and WDC are also a threat. In the face of fierce competition, Seagate will maintain its own quarterly performance goals but they will not be subject to gyrations in investor sentiment. It will also develop new partnerships with suppliers and customers as the storage market shifts into new areas.

He expects other technology companies to follow Seagate's example and go private. Wall Street's relative indifference to pure technology companies, he feels, has inhibited their development by choking off financing or discouraging investments with distant returns.

Investors and analysts might not agree, but Mr Luczo is adamant. "You have to have enough resources flowing back into advancing technology," he concludes.

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