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Harman Buyout Dead?

FOH Staff • News • September 24, 2007

NORTHRIDGE, CA — Harman International’s $8 billion buyout appears to have died Friday afternoon as private equity firms Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. claimed a “material adverse change” and announced their intention to back out of the deal. The move caused Harman stock to plummet. Harman stock peaked at 122 in late April on news of the buyout and was running at about 112 on Friday before news of KKR/GS intentions hit. At press time it was running 80 after starting the day at 78 — a drop of 36% since Friday. 

According to published accounts from the Associated Press, the Washington Post and the Financial Times, officials from the private equity firms are claiming their decision is not based on the current tumultuous marketplace and tight credit situation brought on by the failure of the subprime mortage market, but declined to comment further on the reason. An anonymous source the A.P. says is “familiar with the negotiations” claims the decision is based upon uncertainty regarding Harman's financial health and that it is not a negotiating tactic.

The Financial Times was the most outspoken saying: “It was only a matter of time before private equity had a Mac attack. It is fitting that KKR, the original barbarian, was the first to play hardball on a private equity transaction by claiming a material adverse change (Mac) in the target’s business. That gave it cover to renege on April’s $8bn buy-out, alongside Goldman Sachs, of audio equipment group Harman International.

It is a bizarre outcome. Before the credit markets blew up, Harman was so worried KKR might be getting too sweet a deal that it insisted on its shareholders retaining an equity stub in the company. Now, rather than thinking it has got a bargain, KKR is running for the hills.” For the full FT story click here.

Sources closer to the Harman end of things speculate that the  “MAC” may have been related to Harman’s automobile businesses and the fact that Harman client Mercedes has sold off their Chrylser division which could affect overall automotive sales.

As one source said, “They either can't do the deal because they can't get the money or the money would cost them so much that the deal is no longer as interesting for them. It will be interesting to see if it ends up in court or not. Sid is by no means a dumb guy and may in fact make Harman a ton of money for having them back out.” The MAC claim could be an attempt to back out of the deal without paying the contractually stipulated $225 million termination fee.

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