Big News for JBL/Harman: Good or Bad?

[Titanium Dome]

Just released:

Equity Firms Back Out of Harmon Buyout


Friday September 21, 6:06 PM EDT

WASHINGTON (AP) — Two private equity firms on Friday backed out of their $8 billion buyout of upscale audio equipment maker Harman International Industries Inc., marking the latest such deal to sour amid tightening global credit conditions.

Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc.'s private equity unit told the company they are under no obligation to complete the merger because "a material adverse change" in its business had occurred, Harman said in a statement.

Harman, whose audio equipment brands include Infinity, JBL and Harman Kardon, said it disagreed, but did not make clear what action, if any, it would take.

Investors punished the stock all day long as word dripped out that KKR and GS Capital Partners were attempting to nullify the deal. By the end of the day, Harman shares had plummeted by more than 24 percent.



A person familiar with the negotiations who asked not to be named because he was not authorized to speak publicly told The Associated Press that the private equity firms sought to squash the deal over questions about Harman's financial health, not because of any financing difficulties in a tight credit market. The person said the effort to back out was not a negotiating tactic.

Representatives for KKR and GS Capital Partners did not immediately return phone calls Friday evening.

Shares of Harman dropped $27.25, or 24.3 percent, to $85. In the past year, the company's stock has traded between $79.98 and $125.13, which it hit after the deal was announced in April. KKR and GS Capital Partners agreed to pay $120 per share in cash for Harman and the company's board approved the deal, which was scheduled to close at the end of the year.

The once-booming private equity industry has stumbled during the past few months as tightening credit conditions have caused investors to balk at funding the deals. Buyout firms — which snap up companies and then take them private — had grown used to easy credit, but recently have had a difficult time persuading banks to underwrite their takeovers.

While KKR on Friday had success in attracting investors to a $5 billion loan used for its acquisition of First Data Corp., the company originally planned to raise $14 billion but faced reluctance by Wall Street.

Cerberus Capital Management in July had to inject more equity into its takeover of Chrysler Group from Germany's Daimler. More recently, Home Depot lowered the sale price on its wholesale supply unit by 17 percent to complete its sale to private equity firms.

The Harman deal's collapse comes a day after SLM Corp., commonly known as Sallie Mae, issued a statement saying it expects the investors seeking to buy it for $25 billion to honor their commitments. The Sallie Mae deal includes a $900 million breakup fee compared with a $225 million termination fee in the Harman transaction.

About two hours before Harman announced late Friday afternoon that the buyout was off, NYSE Euronext Inc. issued a release saying the exchange had asked the company if there were any events to explain unusual trading of its stock. Harman said at the time that its policy was not to comment on unusual market activity or rumors.

Shortly before 4 p.m. EDT, however, the company issued a terse press release, explaining what had happened.

The credit crisis caused four of Wall Street's top investment banks to report this week that they wrote-off some $4 billion of loans during the third quarter. In some cases, the banks weren't able to find funding for the loans — or they plunged in value as investors retreated.

There also has been a number of reports that major investment and retail banks have approached private-equity firms about calling deals off. The banks have offered to pay the breakup fees to keep the large loans off their books.

———

AP Business Writer Joe Bel Bruno in New York contributed to this report.

[Titanium Dome]

Mods: feel free to relocate this thread to the proper place if it's not here.

I (and others) had lunch with Jane Harman a couple of months ago to discuss gang and youth violence issues, and I thought maybe I could get a scoop for LH by asking her about the equity thing.

As it turned out, she claimed to have no knowledge of the details, so I got nothing. Maybe she just couldn't say... :dont-know

[BMWCCA]

Looks like a good time to buy! :hmm:

[Audiobeer]

Not if it was overpriced already due to rumors of the trade.

[BMWCCA]

Okay, give it 'til the end of next week. At what point would you pull the trigger? :cool:

[DavidF]

Hmmm. Perhaps the truth is spread among the many nuggets of info. The MAC (Material Adverse Change) is very typical in financial transactions. The reasons for invoking are usually left broadly defined, if defined at all. The credit market has changed whether the equity people will admit it or not. The market can change the cost of a deal and the the seller is not willing to take a cram down on valuation, a deal can easily unwind. Was there some truth to HK's financial condition? Maybe only from the context of the way the deal looked several weeks ago. I recall that the structure had some unusal aspects to it in terms of equity trading for existing stock holders. The tighter credit market can change expectations on financial performance. This combined with inside-the-company scrutiny under due diligence could have made the bankers sour on the deal. Under analysis HK may have been seen as unable to deliver on certain financial benchmarks that needed to be reached at the agreed upon price. Hence the MAC reference. HK's owners may rethink their goal on price but it may be hard to sell to stock holders. Let's see what happens after a cooling off period and some stability comes back to the market.

DavidF.

[Rolf]

What did you eat at lunch? :p


Mods: feel free to relocate this thread to the proper place if it's not here.

I (and others) had lunch with Jane Harman a couple of months ago to discuss gang and youth violence issues, and I thought maybe I could get a scoop for LH by asking her about the equity thing.

As it turned out, she claimed to have no knowledge of the details, so I got nothing. Maybe she just couldn't say... :dont-know

[hjames]

http://www.washingtonpost.com/wp-dyn/content/article/2007/09/21/AR2007092102351.html?hpid=topnews

$8 Billion Buyout of D.C. Firm Collapses

Biggest Deal to End Since Credit Crisis

By David Cho (http://projects.washingtonpost.com/staff/email/david+cho/)
Washington Post Staff Writer
Saturday, September 22, 2007; Page A01




The $8 billion buyout of audio-equipment maker Harman International Industries (http://projects.washingtonpost.com/post200/2007/HAR/) collapsed yesterday, the first major private-equity deal to unravel since the current credit turmoil began and a sobering sign for other big takeovers in the works.


Harman, of the District, said its would-be buyers, Kohlberg Kravis Roberts and Goldman Sachs (http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=GS&nav=el), accused it of breaching a clause in the contract, allowing them to walk away after paying a $225 million termination fee. Harman denied the accusation, but it did not describe the nature of the alleged breach. The company and the bidders declined to comment further.


If Harman chooses to fight, the battle would almost certainly end up in the courts, pitting Sidney Harman, an 88-year-old philanthropist who is married to Rep. Jane Harman (http://www.washingtonpost.com/ac2/related/topic/Jane+Harman?tid=informline) (D-Calif.), against two of the most powerful titans on Wall Street (http://www.washingtonpost.com/ac2/related/topic/Wall+Street?tid=informline).


The disintegration of the deal, rumored for much of the day before it became public, helped send Harman shares plunging 24 percent in regular trading. After hours, the stock dropped another 3 percent.


It also left analysts and others wondering what effect the collapse would have on buyout king Henry Kravis (http://www.washingtonpost.com/ac2/related/topic/Henry+Kravis?tid=informline) and on Goldman Sachs, the world's largest investment bank. Any time a company reneges on an agreement, it puts its reputation at risk. It may find companies reluctant to do deals in the future, said several analysts who follow mergers and acquisitions.
The breakup could set a precedent for other private-equity firms to get out of acquisitions that have become less profitable because of the rising cost of financing big buyouts, the analysts said.


Harman built his company over the last half-century into a multibillion-dollar manufacturer of high-end audio nameplates like JBL, Harman Kardon and Infinity. He negotiated a deal that allowed Harman shareholders to roll over their stakes into a KKR private-equity fund; usually, such investors are bought out.


In an interview in May, shortly after the deal was negotiated, Harman said he was looking for "a secure harbor" for his "beautiful company." He believed he had found it by agreeing to a private takeover.
Since then, private equity has been looking less safe as a haven.
Private-equity firms typically use vast pools of investor money to buy struggling companies, turn them around and sell them at a profit. They make even more off the fees they charge for their services. Business was so good for so many years that private-equity firms started paying ever higher premiums to buy companies. Even the rumor of a private takeover would send a firm's stock soaring.

The Harman deal was negotiated in April, when the credit markets were booming and financing big deals was easy. But a credit crunch in August shook confidence in the financial system, making money far more expensive to borrow.


That has left many private buyers feeling remorse for agreeing to pay high prices for companies. Several private-equity firms are fighting to get out of major deals or renegotiate the price. Carlyle Group (http://www.washingtonpost.com/ac2/related/topic/The+Carlyle+Group+LLC?tid=informline) of the District and two other private-equity firms, for instance, recently got the struggling retailer Home Depot (http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=HD&nav=el) to reduce the price of its wholesale business by $1.8 billion.


Harman's business, too, has had its troubles in recent months. In August, the company reported a lackluster quarter, posting revenue of $911.1 million. That was about $30 million less than the consensus analyst expectation.


To get out of their deal, KKR and Goldman Sachs are citing a "material adverse change" clause, which is included in virtually every buyout agreement but is rarely invoked. It defines what changes would significantly alter the value of a company that would allow its buyers to back out.


Such provisions often are written with very specific language and greatly limit a buyer's options. In Harman's case, KKR and Goldman cannot walk away for events "generally affecting the consumer, or professional audio, automotive audio, information, entertainment or infotainment industries, or the economy or the financial, credit or securities markets."
"These clauses are very tightly written," said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College (http://www.washingtonpost.com/ac2/related/topic/Dartmouth+College?tid=informline). "Something just short of fraud is the only way [KKR and Goldman] could walk away."


Invoking this clause is often used as a negotiating tactic by buyers seeking a lower price. Since 2003, no deal has been canceled because of a material adverse change clause, according to the research firm FactSet MergerMetrics.


KKR and Goldman told Harman that the turmoil in the credit markets was not the reason why they are walking away, said a source close to the matter who spoke on condition of anonymity because he was not authorized to talk publicly about the deal.

A legal battle over the Harman deal could effect other buyouts, such as the $25 billion acquisition of student loan giant Sallie Mae (http://www.washingtonpost.com/ac2/related/topic/Sallie+Mae+Inc.?tid=informline). Its private-equity buyer, J.C. Flowers, has talked about using the material change clause to force the company to consider a lower price. On Thursday, Sallie Mae released a statement saying it disagreed with J.C. Flowers on the matter.

[BMWCCA]

To my naive eyes it looks like two possibilities remain:

1. The deal goes through but at a much lower negotiated share price

2. The deal doesn't go through which leaves Harman pretty much as it was.

In the first scenario, Harman is broken up any way and Sidney and family get the boot eventually. Shareholders get screwed as the trumped-up violation of the agreement and invoking of the cancellation clause is only a bargaining chip. Eventually this would mean no legacy support and all manufacturing off-shore; Chinese stamped frames, generic magnets, and retro D130Fs painted in orange lead-based paint.

In the second, Sidney and his heirs continue business as usual, jump-start their marketing department, quit relying on piecemeal work for an elite inside the Japanese market, and start selling their top systems in the USA once again.

As I understand it (again, through the naive vision of one disconnected from the equity firm and hedge-fund world), this wasn't really a hostile takeover but nor was it something Harman sought. Does this recent development really change anything other than put Harman right back where it was, share-wise, pre-takeover? Is/was the future of the company in danger prior to the agreement? Seems like there are plenty of folks in the USA with the money to buy the good stuff if it's marketed with the proper panache and buzz. Not that I condone the excess that goes along with such disregard for the value of a buck. Maybe Harman could become the "greenest" of all speaker makers and ride that current fad wave?

I look across the road and see someone who paid two-million to buy a 4,200-sq-ft. home on 40 acres, only to clear protected forest illegally to build a 19,000-sq-ft home which will require them to remove the stove from the original home so they can legally declare it only an out building. The owners? A 40-something "retired" private-equity-fund CFO (Carlyle Group) and his wife. Making money by making money does not seem to me to be a laudable goal or a respectable profession. And building a 19,000-sq-ft home these days is just irresponsible and I don't care how "green" it's built. I'd much rather see a family-held manufacturing business prosper and the family who run it continue their philanthropy, support of the arts and non-profits, and to practice corporate responsibility.

[Titanium Dome]

What did you eat at lunch? :p

Beef and mushrooms, broccoli, red potatoes, green salad, and cheese cake. Neither of us ate the beef. :biting:

[edgewound]

There could be a number of scenarios for the undoing of the deal.

*Harman financials are down. They recently got rid of Audax, if I read correctly the bablefish translation from their forum recently. They have grown corporate revenues by acquiring other companies and adding those associated revenues to the corporate financials. Auto sales are down across the board. Harman Motive sells lots to the auto world. Sid Harman is nearly 90 years old....yes a spry, vital 90. But 90 is 90. Looking at the face of Gina Harman from the Japan Tour photos...she looks like she would rather take the money and run for a nice multimillion dollar retirement in her still youngish 50's.

*Maybe KKR is looking to broker a deal with an overseas buyer. The Euro is now ~$1.40, the Canadian dollar is at parity for the first time in 30 years...and China is loaded. It was rumored some 10-15 years ago that Mitsubishi or Sony wanted Harman. There is partnering going on in Japan with Sharp and Pioneer; Sony with Korean Samsung on displays. Who knows who has their predatory eyes on Harman? Look where Harman sells the good stuff. Lots more profit in Everest than in Best Buy crap...and the labor rates in Asia are certainly lower;).

[4313B]

Looking at the face of Gina Harman from the Japan Tour photos...she looks like she would rather take the money and run for a nice multimillion dollar retirement in her still youngish 50's.:rotfl:

[MJC]

There could be a number of scenarios for the undoing of the deal.
It was rumored some 10-15 years ago that Mitsubishi or Sony wanted Harman. There is partnering going on in Japan with Sharp and Pioneer; Sony with Korean Samsung on displays. Who knows who has their predatory eyes on Harman? Look where Harman sells the good stuff. Lots more profit in Everest than in Best Buy crap...and the labor rates in Asia are certainly lower;).
I sure hope Sony never gets their hands on Harman, considering the crap that Sony sells. As far as I'm concerned, the only thing Sony made that was any good was Betamax HiFi.

[Steve Schell]

I'd love to take the money and run for a nice multimillion dollar retirement in my still youngish 50's. Only problem is, I can't even afford to retire in a van down by the river.

[Titanium Dome]

I'd love to take the money and run for a nice multimillion dollar retirement in my still youngish 50's. Only problem is, I can't even afford to retire in a van down by the river.

Thus,

[Steve Schell]

You got it, TD. See any similarities?

[4345]

I think the private equity guys just wanted a cheaper price. The value of the company has dropped about 25% already. That is a lot more than the 250 million dollar penalty. I think Harman is still a good company that is highly prized by Asian consumers. With so many Chinese consumers becoming more wealthy, I think Harman is a great stock to own. I might not buy on Monday, but soon if it drops much more.

I am a little concerned about the fancy dinner party photos and the lack of selling all their product line in the U.S. It seems like the folks at JBL don't like to make money. The shareholders might not be too happy with that.

[Ian Mackenzie]

Oh my god...take that down ......LOL

[Audiobeer]

I'd love to take the money and run for a nice multimillion dollar retirement in my still youngish 50's. Only problem is, I can't even afford to retire in a van down by the river.

Hell everyday I get up and go to work "The Van Down by the river" looks beter and better. :D

[brutal]

Dunno, I'm not a financial geek by a long stretch, FDC just happens to be one of my IT clients. :-)


http://investor.shareholder.com/common/alerts/FDC/default/logo.gif
For the latest news from First Data Corporation titled:
First Data Announces Completion of Acquisition by KKR
Please visit:
http://ir.firstdatacorp.com/releaseDetail.cfm?ReleaseID=265610

[scott fitlin]

To me, its a bad sign. It is in line with everything going on at the moment. The credit crisis, the mortgage market going down the tubes with all those creative mortgages.

I honestly see this country headed into a recession, a deep one at that.

Not that I wanted to see JBL sold to a private equities firm, but how can a deal like this falling apart be good?

[Titanium Dome]

To me, its a bad sign. It is in line with everything going on at the moment. The credit crisis, the mortgage market going down the tubes with all those creative mortgages.

I honestly see this country headed into a recession, a deep one at that.

Not that I wanted to see JBL sold to a private equities firm, but how can a deal like this falling apart be good?

Scott

I have to say the current mortgage crisis has been good to me. I resisted the urge to jump on the bandwagon when interest was low, credit was easy, and prices were spiking. I keenly felt as though I were being left behind, and despite years of saving, every month I fell further away from home ownership.

Now, all of a sudden, hard working, long term guys like me have a chance to get a home. I have good credit, 20% down, falling interest rates, and declining prices. I think there are lots of people like me who will eventually bring sanity back to the market.

While I feel sorry for all those people who did stupid things in real estate, it's a lesson long overdue for many of them. They need to get out from under the illusion that everything comes easy and that they deserve a high standard of living without paying any dues.

Here's the lesson: work hard, curb spending, and save up for your dreams.

I think some of the venture capitalists and equity firms need a reminder of this lesson, too. In fact, they need a sharp, hard crack on the ass. Sometimes you work hard and get very little return; sometimes you lose money instead of make it; sometimes credit dries up and your funding partners turn a deaf ear; there's risk involved. I think these guys just got a wake up call, and I think Harman International will be just fine without them. In fact, Harman might just come out ahead if Sydney plays this right. :yes:

[4313B]

Bingo!

Nice post Dome.

[scott fitlin]

Scott

I have to say the current mortgage crisis has been good to me. I resisted the urge to jump on the bandwagon when interest was low, credit was easy, and prices were spiking. I keenly felt as though I were being left behind, and despite years of saving, every month I fell further away from home ownership.

Now, all of a sudden, hard working, long term guys like me have a chance to get a home. I have good credit, 20% down, falling interest rates, and declining prices. I think there are lots of people like me who will eventually bring sanity back to the market.

While I feel sorry for all those people who did stupid things in real estate, it's a lesson long overdue for many of them. They need to get out from under the illusion that everything comes easy and that they deserve a high standard of living without paying any dues.

Here's the lesson: work hard, curb spending, and save up for your dreams.

I think some of the venture capitalists and equity firms need a reminder of this lesson, too. In fact, they need a sharp, hard crack on the ass. Sometimes you work hard and get little return; sometimes you lose money instead of make it; sometimes credit dries up and your funding partners turn a deaf ear; there's risk involved. I think these guys just got a wake up call, and I think Harman International will be just fine without them. In fact, Harman might just come out ahead if Sydney plays this right. :yes:You know, I agree with you. With the mortgage market hitting bottom, and all the stupid things people did, it does give smart, hard working people like yourself, myself, etc, the chance to buy homes at good prices, and decent low interest on your mortgages. BUT, still, whats happening will have serious ramifications on the financial world, and this country.

I also feel Harman will come out of this just fine, and Im glad JBL isnt being sold off to some equities firm, that isnt the problem. The problem is I see us headed for a financial crisis, maybe even recession.

But, yes, falling prices, and low interest will be good to those who werent frivolous in the first place.

[Don McRitchie]

I don't know any of the details of the proposed deal, but from the surface, I would say that its disruption looks like a good thing.

As I understood it, the KKR/GS deal was a leveraged buyout. The $8 billion purchase price would be borrowed, and rather than the new owners (KKR/GS) being responsible for the debt, Harman would corporately assume the debt. Therefore, under the new owners, Harman would have started business with a huge debt load to service and an expectation for greatly increased profits. This is a massive contradiction. Harman would be in a significantly weaker financial position with demands to raise profitability to levels never before achieved in its corporate history.

This situation would have to lead to a massive cost cutting exercise, with the most like scenario being a complete divestiture of manufacturing to Chinese contractors. In the worst case, the company could be downsized to strictly a marketing and product definition operation with design, engineering, and manufacturing all out sourced and off shore. This would free up expenditures in both personnel and and facilities with the potential closure of Northridge and its obvious significant costs. Further, there would be strong impetus to sell off divisions of the company piece meal with the hopes that the parts are worth more than the sum. Elements of this occurred with Altec Lansing and look where they are now.

If Harman has to be acquired, it would be a better situation if it was by a larger company in the same industry. Even Sony, with their poor track record with acquisitions, would be a better solution than that of a hedge fund pursuing a leveraged buyout.

For the time being, I'm guessing that this deal is dead. I don't think that price is really the issue, even though it would appear that KKR/GS was paying an inflated premium for Harman. The credit crunch means that the market liquidity necessary to finance leveraged buyouts (pretty much the air that hedge funds breath) has become near non existent.

Don

[boputnam]

...(they) would ... sell off divisions of the company piece meal with the hopes that the parts are worth more than the sum. :yes: And, parse the accumulated debt to the business segments at their sale(s). So, each of these pieces on sale need to maintain their prospective value for the entire deal to succeed (from KKR's perspective).


The credit (crisis) means that the market liquidity necessary to finance leveraged buyouts (pretty much the air that hedge funds breath) has become near non existent.:yes:, but the malaise is not restricted to hedge funds.

In taking the business private, KKR would have restructured (read: gutted) the business as we know it - there would no longer be (public) equity holders to report to (or appease), and the creditors would already be on-board with KKR's plan beforehand. KKR would then have fashioned it up for re-listing in an IPO somewhere down the road, hoping for a multiple of their acquisition valuation.

The current markets have intractably tight liquidity - there is money around, but no-one wants to part with it until they can know for certain that the calls on their own obligations can be met (i.e., that they themselves are not liquidity constrained). This may persist for sometime until all pieces of investment portfolios can be properly valued - valued in the market by willing sellers and willing buyers, not by "mark to market" methods.

Now, neither hedge funds nor public investors are aggressively chasing new investments. A weakening dollar is a material change to this landscape - the w/w currency wobbles suggests goods made overseas may not have the cost advantage they have long held. Valueing business right now is more difficult than usual. KKR is smart - there is no urgency to do this deal.

While bashing KKR can be fun, it may be that the result of their initiative might make sense. That is naively wishful thinking on my part, but if they simplified the product lines, reducing self competition and strengthening the JBL brand, selling off non-performing, non-core segments, it could be better. Regrettably, this is not typically the outcome...

[boputnam]

Clearly, KKR had a whole number of deals logger-jammed. Some, are eeking through...

-----------------------------------------------------------------------
KKR Banks Selling $10 Billion of First Data Loans
2007-09-27 11:05 (New York)

By Cecile Gutscher and Bryan Keogh

Sept. 27 (Bloomberg) -- Banks financing Kohlberg Kravis Roberts & Co.'s acquisition of First Data Corp. plan to sell as much as $10 billion of loans today, double the amount targeted last week, said two people with direct knowledge of the deal.

Six underwriters led by Credit Suisse Group, Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc. will issue as much as $8 billion of the debt at a discount of 4 percent of face value. A further $2 billion will be sold at a 3 percent cut, said the people, who declined to be identified because details of the sale are private.

``It's a significant event on the road back to normality,'' said John Pattullo, who manages about $2 billion of mainly high- yield bonds and loans at Henderson Global Investors in London. ``It shows that investors at least will accept a market clearing price and that wasn't the case a month ago.''

Buyers are starting to return to high-yield debt after the record foreclosures on subprime mortgages prompted investors to shun all but the safest debt during July and August. First Data's banks had reduced the loan sale to $5 billion from $14 billion earlier this month because of a lack of demand.

Underwriters sold more than $7 billion of leveraged loans in the U.S. in the last two weeks, reducing their backlog of postponed debt offerings to about $370 billion, according to Bank of America Corp.

`Less Panic'

``It's a virtuous cycle,'' said Raja Visweswaran, Bank of America's head of European credit strategy in London. ``The more deals that clear the market, the more confidence from investors and less panic from deal arrangers.''

Leveraged buyouts, which were at a record $613 billion in the first half of the year, slowed to $167.4 billion since then because banks stopped financing new deals.

Total sales of U.S. leveraged loans declined to $12 billion this month from more than $50 billion in June, according to Standard & Poor's. The LCDX index, a gauge of confidence in the U.S. leveraged loan market, has risen 8.2 percent to 97.4 from a low of 90 on July 30, according to Goldman Sachs Group Inc. The benchmark, which increases as investor confidence improves, rose 0.05 today.

First Data's loans pay annual interest of 2.75 percentage points over the London interbank offered rate, unchanged since the deal was announced in July. With a 4 percent price discount, that raises the yield to about 4.3 percentage points more than Libor, according to data compiled by Bloomberg.
HSBC Holdings Plc, one of the First Data underwriters, will keep about $2 billion of the loans until the end of the year, with an option to sell at 98 cents on the dollar or more, the Financial Times reported today, without saying how it got the information. HSBC spokesman Donal McCarthy in New York declined to comment.

Alliance Boots

Bankers for the Greenwood Village, Colorado-based credit- card processor will sell between $9 billion and $10 billion of the loans, the people said. They still need to find buyers for a further $9 billion of planned bonds.

New York-based KKR, run by Henry Kravis and George Roberts, agreed to buy First Data in April, before the subprime mortgage rout caused the collapse of collateralized debt obligations that buy leveraged loans.

Another KKR deal, the 9 billion-pound ($18 billion) financing for the acquisition of U.K. pharmacy chain Alliance Boots, has languished on underwriters' books since July.

Banks underwriting the financing for LBOs commit to raise the money and earn fees to compensate for the risk of having to take on any debt they can't sell to a wider group of investors. They have to mark down the value of the debt and assume a loss if the price of high-yield loans falls below 100 percent.

[Ducatista47]

This may persist for sometime until all pieces of investment portfolios can be properly valued - valued in the market by willing sellers and willing buyers, not by "mark to market" methods.This would not be popular with most investors. If one were to value stocks on the originally intended criteria instead of the current speculative instrument model (owning part of a corporation and earning dividends on your investment versus buying and selling that ownership), the Dow, for instance, would be at well less than 3000 by my wild guess. There are not many Warren Buffetts and plenty of every other type.


While bashing KKR can be fun, it may be that the result of their initiative might make sense. That is naively wishful thinking on my part, but if they simplified the product lines, reducing self competition and strengthening the JBL brand, selling off non-performing, non-core segments, it could be better. Regrettably, this is not typically the outcome...The way you put it, Harman sounds like General Motors.

Great comments, Bo, as usual.

Clark

[boputnam]

The way you put it, Harman sounds like General Motors.Ha! You're right, Clark - even more like GE!! GE comprises a host of really interesting businesses that alone could garner high valuations, but they are buried in a mega corporation where their contribution is diluted. I'd love to invest singly in their turbine business or some of their alternative energy or water segments, but unless they unbundle, there is no point. :dont-know

[Ducatista47]

Funny thing, Bo. GM divested its Electro Motive Division - EMD, the locomotive unit - and now it has to fend for itself. Guess who is kicking the crud out of it. The resurgent General Electric locomotive division, which used to tumble in EMD's wake.

Lord, I miss the days when most oil burning locos came from the LaGrange, Illinois plant. The same days when JBL was a powerhouse in the home market. I'm getting old.

Clark

[boputnam]

A weakening dollar is a material change to this landscape...I was reminded of this thread when I read this article yesterday.

Outsourcing costs are getting smarted by the declining dollar.

http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,89942,00.html

[hjames]

from http://blog.washingtonpost.com/washbizblog/?hpid=news-col-blog


Posted at 06:54 AM ET, 10/22/2007

Harman, Buyers Settle Over Aborted Merger

Kohlberg Kravis Roberts & Co. and Goldman Sachs have agreed to invest $400 million in Harman International Industries in the wake of their decision to walk away from an $8 billion deal to buy the District company.


"Although we do not agree with the reasons for cancellation of the original merger agreement, we view this $400 million investment as a vote of confidence in our business and its prospects for continued growth," Haman's executive chairman Sidney Harman said in a statement.


According to a press release, KKR and Goldman's investment entity GS Capital Partners will "purchase $400 million of 1.25% senior notes convertible under certain circumstances into Harman common stock, convertible at a price of $104 per share."


Harman shares closed at $86.40 on Friday.


KKR and Goldman called off the deal, saying unspecified changes in Harman's business made it no longer feasible. The settlement means the investment firms will not have to pay a $225 million termination fee.

[Titanium Dome]

:hmm: The price of freedom: $400 million.

It appears the weakness was with the equity group, not with Harman.

Thanks, Heather.

[boputnam]

:hmm: The price of freedom: $400 million.Not exactly, unless you are referring to the KKR group... :)

Harman was snookered out of the $225MM break-up fee; the KKR consortium alledged a "material adverse change" subsequent to the agreement, allowing their walk.

Although not paying the $225MM fee, the private equity group was clearly not on firm ground - they provided funding to HAR by the purchase of $400MM of converts, with a 1.25% coupon, but are not allowed to sell these nor hedge against them (sell short HAR common, as is most often done when investing in converts) for 12-months. This seems a weak deal from KKR's perspective.

The strengthened HAR balance sheet has allowed S&P to move it's view of the BB- rating on HAR corporate credit to "positive".

Below is today's article in the FT.

[Titanium Dome]

Not exactly, unless you are referring to the KKR group... :)

Harman was snookered out of the $225MM break-up fee; the KKR consortium alledged a "material adverse change" subsequent to the agreement, allowing their walk.



Exactly, it was KKR's price of freedom. I imagine they not only avoided paying out $225 million with no return, but also avoided potential legal expenses and losses that would be in excess of $400 million. Plus, a $400 million investment is easier to explain than a $225 million loss.

Dr. Sydney gets a solid boost to the company's bottom line and cedes virtually nothing in return. Shrewd, if you ask me. Snookered? Not! :)

[boputnam]

Snookered? Not! :)Yea, agreed. :yes:

Faced with their sole bidder walking, securing $400MM in low-cost financing was an excellent end-game (particularly in this freaked-out credit market!! :shock: ).

Some news releases speak of HAR using these proceeds for share buybacks. :blink: I personally cannot envision how shrinking the capital structure will really benefit the going concern aspects of HAR.

At HAR's valuation in this economic climate that would not be my first thought (I am not a venture capitalist but clearly, KKR backed away... :hmm: ). Were it me, I would plow the proceeds into decisive and insightful R&D for competitive products using alliances with competitors and first-entry players. Let's scrimmage!