April 27, 2007
The Harman Buyout
The new KKR buyout of Harman International Industries Inc is getting press for its offer to include the Harman shareholders in the buyout group. The offer is a symptom of a much larger problem, the conflict of interest inherent in buyouts that include managers in the buyout group. The Harman offer attempts to blunt the criticism by giving target shareholders the option of also joining the buyout group. This is no solution; it is a band-aid. First, the target shareholders will hold a partnership in the buyout group with no control powers and, second, unless the target shareholders receive a return identical to the managers that participate in the buyout group (and this is not going to be true -- I did not fall off the turnip truck), the conflict remains. If the motivation is pure financing, the buyout group will be able to reduce reliance on other funding sources, it makes sense. As a move to blunt criticism of conflicts -- it ought fail.
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