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Boston College Law School

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Thursday, April 26, 2007

Harman's Shopping Spree

Harman International Industries, Inc., the audio equipment maker, this morning announced an agreement to be acquired for $7.8 billion by Kohlberg, Kravis Roberts & Co. and Goldman Sachs Group Inc.'s private equity arm, GS Capital Partners.  The price offered, $120 a share, is a 17% premium to Wednesday's closing price on the New York Stock Exchange.  Not surprisingly these days, management is participating in the buy-out and Dr. Harman, who owns approximately 5% of the outstanding common stock of Harman, will own at least 2.5% of the newly private company. 

The transaction is interesting for two reasons:

First, Harman’s stockholders will be offered the opportunity to elect, on a purely voluntary basis, to exchange some or all of their shares of Harman stock for shares in the newly private corporation. The total amount of Harman shares that that they may elect to receive in the post-transaction corporation is approximately 27% of the post-transaction equity in Harman.  The stock will not be publicly traded.

Second, the agreement contains an increasingly common provision known as a "go-shop".  Under the provision, Harman may solicit proposals for alternative acquisitions for a 50-day period.

I've blogged before about the perils of management participation in private equity buy-outs.  Their participation is likely to give an undue and trumping head start to their chosen private equity firm(s) due to management's head-start, superior information and ability to (unduly) influence the acquisition process even when a special committee is present.  To ameliorate this problem, special committees have been negotiating "go-shops" like the one here.  And two of the biggest private equity deals of last year Columbia HCA and Freescale included the provision (for the details see the announcement press releases here and here).  But in neither case did competitors emerge, likely due to the involvement of management in the initial deal.  Accordingly, investors have increasingly come to see "go-shop" provisions as cover for unduly large break-up fees and the significant advantage and head-start provided by management participation.  We'll find out Harman's negotiated break-up fee in the next few days.  But, the shareholder participation feature is encouraging.  It gives shareholders a real option to participate in what may be seen as a management cash-out.  It may be a good solution to some of the problems with management/private equity partnered buy-outs.  It also fortuitously alleviates KKR & GS's financing burden for the purchase.  Harman's stock price closed at $122.50 which is above the offering price, so it may be that Harman's stockholders are highly valuing this opportunity (that leads to a whole host of other concerns as to why it can't just do the same thing as a public company).  Or, of course, they are expecting a higher bid to emerge as Harman goes shopping . . .

Also, for those who keep track of such things, Simpson Thacher & Bartlett was legal adviser to the private equity group, Wachtell, Lipton, Rosen & Katz was legal adviser to the special committee of the Harman board of directors, and Jones Day was legal adviser to Harman.

http://lawprofessors.typepad.com/mergers/2007/04/harmans_shoppin.html

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