Investment Firms to Acquire Harman International for $8 Billion

In the deal, Harman stockholders will get $120 for each share of common stock or exchange them for stock in the new company. The deal, spurred when Kohlberg Kravis reached out to Harman, partly stems from succession planning, CFO Kevin Brown told us. Sidney Harman, 88, will remain exec. chmn., but the company is in final contract talks with a new CEO, who could arrive in 3-4 months, Brown said. Harman has had no CEO since Dec., when temporary chief Bernard Girod retired. Girod replaced Douglas Pertz, who resigned in Aug. after less than 4 months on the job (CED Aug 31 p8). Pertz’s resignation came despite his having been “vetted quite throughly,” Harman said at the time. Shareholders have pushed for a succession plan for Harman, who founded the company as Harman Industries in 1952. Harman’s stake in the company is “a little north of” 5%, Brown said. Current stockholders are eligible to get up to 8.3 million shares (27%) in the new company.

The possibilities of hiring of a new CEO and selling to Kohlberg Kravis arose separately, but “they're both tied to succession of the leadership teams and the transition of that at the company which has been an open question among investors for quite some time,” Brown said. Brown declined to comment on when Kohlberg Kravis first voiced interest in buying Harman, which has the right to seek “alternative transactions” from 3rd parties for a 50-day period ending June 15, the company said. The proposed sale carries a $50.3 million break-up fee, Brown said.

Citigroup analyst John Rogers called the proposed sale price “a little bit light” given that Harman is at “the base of its growth curve,” and questioned what Kohlberg Kravis will provide that the public market can’t. Rogers earlier this year tagged Harman as a leveraged buyout candidate, projecting that purchasers would pay a 20% premium to its stock price. The Thurs. offer was 17% above Harman’s closing stock price the day before. Harman’s stock price was trading up 19.7% Thurs. afternoon at $122.84, appearing to indicate investors were betting a higher bid would emerge.

Harman countered that Kohlberg Kravis and GS Capital Partners are “superbly funded” and possess a “business acumen” and a network available to Harman thanks to their “history and competence.” The deal would result in “a safe supportive harbor for the company and for its employees, customers and suppliers,” Harman said.

Harman sold his company once before. After founding and rapidly expanding it with moves like a 1969 purchase of JBL, Harman sold it to Beatrice Foods in 1977. After serving as deputy commerce secretary in the Carter administration 1978- 79, Harman repurchased the company in 1980. Since then, it has acquired a series of companies with high-end brands like Mark Levinson, Madrigal and Lexicon, plus outfits specializing in multimedia and networking like PhatNoise and QNX. In 2001 the company embarked on an aggressive push to build its auto OEM business. The OEM segment, which at the time accounted for about 50% of the company’s annual revenue, since has grown to be about 70% of sales on the strength of Harman’s Media Oriented System Transport (MOST) fiber-optic bus network technology, installed in more than one million vehicles.

In recent years Harman has struggled with its consumer and professional business, undergoing several restructurings, including layoffs at 4 plants in Europe tied to its automotive business (CED Oct 31 p4). Another round of “rationalizing” engineering and production costs is expected to bring a 10-15 cents charge against fiscal Q4 earnings, Brown said. Brown declined to provide details, but Harman has said the revamping will fix “increasingly inapplicable manufacturing facilities” (CED Jan 29 p2). Harman has made several forays into video, including a 1999 launch of CRT- based front projectors under the Madrigal Imaging brand. It sold those assets 3 years later.

Meanwhile, Harman Q3 net income improved to $71 million from $64 million a year earlier as revenue jumped to $882 million from 801.4 million. Automotive revenue rose 10% to $624.9 million, while CE sales grew $11.3 million to $118 million. The consumer business’s operating margins were about 1.5%, down from 4% in Q2, due largely to price competition in multimedia products, officials said. Harman encountered heightened competition in Europe for its Harman- Becker portable navigation device (PND), which sold about 84,000 units in Q3, down from 130,000 the previous quarter. Harman expects sales of the Harman-Becker device to reach 618,000 units this year. As of March 31, Harman had about $75 million in Harman-Becker PND inventory, stock to shrink to $15 million by June 30, Harman said. Harman recently began shipping PNDs to U.S. retail.

Harman recorded about $4 million in revenue from Chrysler from the MyGig hard drive-based head unit featuring a 20 GB hard drive for ripping CDs and storing navigation data. MyGig is available with the 2007 Chrysler Sebring and Pacifica. Harman has a $550 million multi-year deal with Chrysler.

Harman expects its infotainment system to expand in 2008 to include driver assistance such as night vision, 360-degree visibility and air bag sensors. By 2014-2015, driver aid could mean a 50% “enhancement” to Harman OEM revenue, Harman said. Harman has an exclusive agreement with Land Rover for audio in model years 2011-2015, it said. The deal will generate about $50 million in annual revenue, he said.

Harman continues to battle a “bulge” in R&D spending, including $34 million more than forecast this year and $46 million more in 2008, company officials said. Fiscal 2007 R&D spending will hit $309 million, up from an earlier projection of $276 million, Harman said. Much additional spending stems from $1.1 billion in new automotive business, including an $800 million contract with BMW to supply entertainment systems across that manufacturer’s line starting in 2009. The deal, which expands Harman’s reach with BMW from high- to mid-range, is expected to produce about $200 million in annual revenue starting in 2009.