By DENNIS K. BERMAN
October 22, 2007 6:36 a.m.
Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. terminated their $8 billion takeover for Harman International Industries Inc., with the two sides agreeing to a far more modest investment that will spare litigation.
Under the agreement, KKR and Goldman's private-equity arm will buy $400 million worth of Harman convertible debt securities. These securities will pay out 1.25% in interest annually, and will be convertible into Harman stock should its shares reach $104 each sometime over the next five years. Harman shares were at $86.40, down $1.18, in 4 p.m. New York Stock Exchange composite trading Friday.
KKR and Goldman won't have to pay the $225 million termination fee called for under the original deal. KKR partner Brian Carroll will also be added to Harman's board.
Harman is just one of many private-equity deals to have been caught in a financial netherworld, where buyers have soured on announced transactions, and are either unable or unwilling to fund their commitments.
The most prominent of these situations is the increasingly bitter feud over student lender SLM Corp. In that case, a $25 billion agreement by buyers J.C. Flowers & Co., J.P. Morgan Chase & Co., and Bank of America, has landed in the Delaware courts.
While the rhetoric of the SLM case has become increasingly hostile, the case of Harman suggests that corporate boards can be practical-minded. "There were no positive outcomes here," said one person involved in the recent Harman negotiations. "The bottom line is what do you want to do to make shareholders the most amount of money over time?"
The Harman agreement is something of a realpolitik solution to what could have been a nasty confrontation between buyer and seller. In April, KKR and Goldman were prepared to pay $120 per share for the well-known maker of audio equipment. But changes in Harman's business results spooked KKR and Goldman, whose damages for breaking the deal were capped at $225 million.
The agreement may not be enough to placate some shareholders. Where Harman was once valued at $8 billion by its suitors, it now carries a market capitalization of $5.6 billion.
Proceeds from the convertible offering will be used to buy back stock, and therefore placate some shareholders.
The agreement spares months of litigation for the Washington, D.C.-based company. A court case would have been unavoidable should Harman have hoped to collect the termination fee. KKR and Goldman were prepared to assert that Harman's business had changed so materially that they didn't need to pay it.
People close to both sides of the Harman transaction said they didn't want to spend tens of millions of dollars for attorneys' fees. Nor were Harman officials keen on dragging the minutiae of their business into public view, said two people familiar with company's thinking.
Write to Dennis K. Berman at firstname.lastname@example.org