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Thread: Big News for JBL/Harman: Good or Bad?

  1. #1
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    Big News for JBL/Harman: Good or Bad?

    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.

  2. #2
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    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

  3. #3
    Senior Member BMWCCA's Avatar
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    Looks like a good time to buy!

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    Senior Member Audiobeer's Avatar
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    Not if it was overpriced already due to rumors of the trade.

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    Senior Member BMWCCA's Avatar
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    Okay, give it 'til the end of next week. At what point would you pull the trigger?

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    Senior Member DavidF's Avatar
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    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.

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    RIP 2013 Rolf's Avatar
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    What did you eat at lunch?

    Quote Originally Posted by Titanium Dome View Post
    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

  8. #8
    Heather [Senorita member] hjames's Avatar
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    Harman story from the WaPo

    http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

    $8 Billion Buyout of D.C. Firm Collapses

    Biggest Deal to End Since Credit Crisis

    By David Cho
    Washington Post Staff Writer
    Saturday, September 22, 2007; Page A01





    The $8 billion buyout of audio-equipment maker Harman International Industries 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, 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 (D-Calif.), against two of the most powerful titans on Wall Street.


    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 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 of the District and two other private-equity firms, for instance, recently got the struggling retailer Home Depot 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. "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. 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.
    2ch: Oppo, Acurus RL-11, JBL 240ti, Heath AS101, Carver TFM-25,Von Schweikert VR4
    7: Oppo BDP103D, B&K, UREI 809A, JBL B460,

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    Senior Member BMWCCA's Avatar
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    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.

  10. #10
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    Quote Originally Posted by Rolf View Post
    What did you eat at lunch?
    Beef and mushrooms, broccoli, red potatoes, green salad, and cheese cake. Neither of us ate the beef.

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    Senior Member edgewound's Avatar
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    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.
    Edgewound...JBL Pro Authorized...since 1988
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    Quote Originally Posted by edgewound View Post
    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.

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    Quote Originally Posted by edgewound View Post
    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.

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    Senior Member Steve Schell's Avatar
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    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.

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    Quote Originally Posted by Steve Schell View Post
    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,
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