When Kohlberg Kravis Roberts & Co. and Goldman Sachs decided to call off their projected $8 billion takeover of Harman International Industries, Inc., industry experts predicted the audio company would take the two financial firms to court, if not to gain the $225 million termination fee, to force them to abide by their material adverse effect statement and complete the transaction.
However, other analysts predicted that the era of bloated leveraged buyouts might be over, citing the pullout of J. C. Flowers, J.P. Morgan, and Bank of America from their proposed $25 billion takeover of SLM Corp., not to mention KKR's ultimately unprofitable $29 billion LBO of First Data Corp., as further proof. It looks as though the naysayers have the real scoop, as Harman said October 22 that it would absolve KKR and Goldman of their termination fee if they assumed $400 million of its debt. The buyout kings will purchase $400 million in senior bonds at an interest rate of 1.25%. If the company goes bankrupt, KKR and Goldman Sachs would be paid before the company's stockholders; however, if Harman stock hits $104/share, the companies can convert their debt to stock—but only after one year.
Harman stock closed at $84.12 on Friday, October 26.
The settlement gives Harman a cash infusion, while preventing a lengthy, costly, and ultimately debilitating lawsuit. Harman shareholders expressed satisfaction with the deal.
In a press release, Henry R. Kravis, co-founder of KKR, said: "The merger unfortunately could not be completed, but we are pleased to make this investment in the company. We believe this investment and our representation on the board is an outstanding way to support Harman and its management team in the future."
Dr. Sidney Harman obviously agreed. In Harman's statement, he said, "If we had proceeded down the path of litigation, it would have tied us up for a very lengthy time—it would have been a continuing distraction. There's no guarantee we would win, no matter how confident we are."
