Harmon Int'l 2 B Sold

[mas]

In an announcement that it seems only Duke noticed, I was rather surprised that there was not more reaction. Or make that "any" reaction!

(I must admit that the last line of the article did elicit a wry chuckle...) Needless to say, the "Harmonization"of the audio industry has not been a pretty sight to watch.

Here is the story from FOH (Front of House):

April 27, 2007 "Harman International Industries, Inc. (NYSE:HAR), parent company to the
Harman Professional Group whose brands include JBL, Lexicon, BSS, AKG,
dbx, Soundcraft and Crown, announced April 26 that it has entered into
an agreement to be acquired by affiliates of Kohlberg Kravis Roberts
& Co. L.P. (KKR) and Goldman Sachs Capital Partners (GSCP) in a
transaction valued at approximately $8 billion. The transaction was
unanimously approved by the Harman board of directors.


The buyers are proposing to pay $120 per share in cash, or a
17 percent markup over the previous days closing value. However, the
companys shares jumped 19.5 percent on the news, to $122.60 over two
dollars more than the KKR offer suggesting that other LBO partners
may make higher bids on the company. Under the terms of the agreement,
Harman has till June 15 to solicit competing bids. Harman shareholders
will have the opportunity to buy up to 27 percent of the equity in the
new privately held company. At the offer price, the five percent stake
owned by company founder Sidney Harman, who it was announced would
remain at chairman, would be worth approximately $400 million.



Harman reported third-quarter net income of $71 million, or $1.07 per
share, compared with $64 million, or 94 cents per share, last year.
Sales rose to $882.8 million from $801.5 million, with revenues meeting
financial analysts expectations and earnings-per-share exceeding them
at $1.09.



Harman, based in Northridge, CA, is a huge player in the pro audio
industry, particularly in touring sound, installed systems, broadcast
and music recording. However, approximately two-thirds of Harman's
revenues are from sales of GPS, stereo and entertainment systems to
upscale automakers including BMW, DaimlerChrysler and Porsche.
DaimlerChrysler alone accounts for 25 percent of sales.



New York-based KKR specializes in leveraged buyouts (LBOs). A common
outcome for LBOs is a restructuring of the acquired company via a
sell-off of underperforming divisions and other cost-cutting measures,
to create a leaner core entity that can then be resold at a profit.



Thats likely to occur in Harmans case; whats less certain is how it
will take place. Harmans automotive group remains the star performer,
suggesting it will be the cherry at the center of any subsequent deal.
But the automotive group has its own problems: revenues from Harmans
consumer electronics group are often mixed in with those of automotive,
and market researcher firm iSupply released a finding in April
predicting that the consumer electronics sector will experience a
significant slowdown over the next five years, with growth slowing
from 8.9 percent top 3.6 percent. That will affect most electronics
manufacturers, including Harman. Secondly, automobile sales have hit a
brick wall in recent months, with certain high-end brands including
Mercedes feeling the pinch. Its a trend that hits at Harmans bread
and butter.



On the other hand, the Harman Pro Groups earnings show consistent, if
not stellar, growth in an industry sector that is poised to expand as
high-definition audio becomes a bigger attraction for broadcast and
entertainment products. Touring continues to increase, creating
additional demand for live sound technology; the so-called CEDIA
channel of installed AV is also showing steady growth.



In other words, KKR may not know one end of a microphone from another,
but at some point they will likely realize they have a small gem in
this package.



The Harman Pro Group has a great set of brands in an industry thats
going to need professional technology to make HD sound, said Paul
Gallo, president of the Professional Audio Manufacturers Association,
of which Harman is a member. Gallo discounts the potential for an LBO
for the pro group and says that as KKR becomes more aware of the growth
possibilities in areas including live sound and house-of-worship
markets, the more theyll be inclined to keep the entity together.



Not everyone agrees. One former Harman executive speaking on background
pointed out that KKR historically hangs on to very little of its
acquisition portfolio and that as good as the pro groups numbers are
they accounted for a little over $517 million in revenues last year,
which is 16 percent of overall revenues, according to the companys
10-K filing on the SEC website they are still niche-market small
change compared to the billions that even a slowing consumer
automotive/electronics market accounts for.



What Harman can expect under new ownership is more of what the parent
company had already been imposing, probably with the intent of making
the pro group attractive as part of the larger package: elimination of
more v.p. positions, and more centralization of operations for
example, Harman relocated its AKG operations from Nashville to
Northridge last year, cutting the jobs based there. The moves have made
Harman Pro Group leaner but at the same time somewhat less nimble in
terms customer service, the source pointed out, crucial in an industry
still based largely on personal relationships.



Harman Pro Group can expect some reconfiguration, including the
possibility of consolidation of brands, another source close to the
company said. But the consensus is that end users will likely see
little impact. The products are there, the supply channels are still
largely there, the source said.



Not many people know that RCA is owned by the French. In the end, as
long as the quality of products remains high, end users likely have
little concern precisely who owns what."