Harman International To Be Acquired by Goldman Sachs and KKR for $8 Billion By Wes Phillips April 28, 2007 — Harman International Industries, Inc has agreed to be acquired by Goldman Sachs Capital Partners (GSCP) and Kohlberg Kravis Roberts & Co. (KKR) for a price of $120 per share (a total near $8 billion). The share price represents what Bloomberg.com characterized as a 17% premium over its price one day earlier. The company's stock had been increasing in value, having risen by about 2.6% since the beginning of 2007, but beginning April 18, the stock began to surge, "indicating some investors anticipated the buyout," according to Bloomberg. John Rogers, a Citigroup analyst, had predicted in February that Harman was choice for acquisition, estimating that private equity buyers could pay a premium of 20% over its share price and still see annual returns of 20%.

An interesting aspect of the sale is that shareholders can be paid in shares of the new company incorporated by KKR/GSCP, a practice known as stub-equity. The attraction is that the shareholders will then benefit from the profits of future sales of the company, or the profits from its being publicly offered.

Harman will entertain offers until June 15, paying KKR/GSCP a $75 million break-up fee if it accepts a better offer. Some stock analysts doubt that a higher price will be forthcoming, although Standard & Poor's James Peters predicted other bidders will emerge.

In 1953, Dr. Sidney Harman and Bernard Kardon founded Harman/Kardon, offering a FM tuner; in 1954, the company introduced the world's first receiver, combining a tuner with a preamplifier and power amplifier. That was before stereo, of course, but in 1958, HK sold the first stereo receiver brought to market. Over the years, the company began acquiring other audio brands, including JBL, Infinity, Revel, Lexicon, AKG, and Mark Levinson.

More recently, as much as two-thirds of the firm's revenue has been generated from its Harman Automotive division, which manufactures voice-activated controls, audio systems, integrated cell phones, GPS, and backseat entertainment systems for DaimlerChrysler, the BMW Group, Toyota/Lexus, Audi, Porsche, Land Rover, Renault, Hyundai, Kia, the PSA Group, and Volvo.

According to one audio industry observer, our indefatigable "Deep Throat," the appeal of Harman to Wall Street is its automotive arm. "Consumer audio brands are unpredictable—their sales go up and down. The pro market is stable and solid, but not really growing." Automotive OEM, he said, exerts a "unique attraction to other large companies, unlike consumer brands or pro audio."

His prediction? "This may be the time for things to be broken up and eventually sold for more than the $8 billion now being paid."

Disclaimer: KKR is a major shareholder in Primedia, and Primedia has retained Goldman Sachs to manage the sale of Primedia Enthusiast Media, which includes Stereophile magazine.