By Corey Moss
First, the facts and figures as reported this morning:
Samsung Electronics (KRX: 005930) (“Samsung”) and Harman International Industries, Incorporated (NYSE: HAR) (“HARMAN”) today announced that they have entered into a definitive agreement under which Samsung will acquire HARMAN for $112.00 per share in cash, or total equity value of approximately $8.0 billion. Upon closing, the transaction will immediately give Samsung a significant presence in the large and rapidly growing market for connected technologies, particularly automotive electronics, which has been a strategic priority for Samsung, and is expected to grow to more than $100 billion by 2025. HARMAN is the market leader in connected car solutions, with more than 30 million vehicles currently equipped with its connected car and audio systems, including embedded infotainment, telematics, connected safety and security. Approximately 65% of HARMAN’s $7.0 billion of reported sales during the 12 months ended September 30, 2016 are automotive-related, and its order backlog for this market at June 30, 2016 was approximately $24 billion.
HARMAN’s experience designing and integrating sophisticated in-vehicle technologies, as well as its long-term relationships with most of the world’s largest automakers, will create significant growth opportunities for the combined business by enabling it to leverage Samsung’s expertise in connected mobility, semiconductors, user experience, displays and its global distribution channels. In addition, the combination of HARMAN’s brands and audio capabilities and Samsung’s expertise in consumer electronics will deliver enhanced customer benefits and elevate user experiences across Samsung’s complete portfolio of consumer and professional products and systems.
Where bombshell acquisitions go this may be one for the ages, especially in the categories of automotive and connected technologies. However where you refer to HARMAN’s Pro AV side, where 2016 has represented some rather large acquisitions in the industry, it’s hard to say if this one actually fits the category like the others which were all AV solutions.
Simply stated here, HARMAN is the market leader in connected car solutions and the majority of sales were automotive-related. While it’s no mistake that HARMAN is leading off with the automotive as well as significant growth opportunities presented by leveraging Samsung’s leading technologies and global distribution, the “in addition” part is interesting in that it doesn’t necessarily seem to be an afterthought, but a secondary one (or possibly even tertiary considering the great appeal of HARMAN’s connected services) where “brands and audio” are concerned.
“HARMAN perfectly complements Samsung in terms of technologies, products and solutions, and joining forces is a natural extension of the automotive strategy we have been pursuing for some time,” said Oh-Hyun Kwon, Vice Chairman and Chief Executive Officer of Samsung Electronics. “As a Tier 1 automotive supplier with deep customer relationships, strong brands, leading technology and a recognized portfolio of best-in-class products, HARMAN immediately establishes a strong foundation for Samsung to grow our automotive platform. Dinesh Paliwal is a proven global leader and, in our extensive discussions, we have developed deep respect for him, his strong senior leadership team and HARMAN’s talented employees. HARMAN’s sustained track record of rapid growth fueled by technology leadership and an unmatched automotive order pipeline reflects its commitment to innovation and customers.”
Dinesh Paliwal, HARMAN Chairman, President and CEO, stated (in part): “Samsung is an ideal partner for HARMAN and this transaction will provide tremendous benefits to our automotive customers and consumers around the world. Combining Samsung’s strengths in leading-edge displays, connectivity and processing solutions with HARMAN’s technology leadership and long-standing customer relationships will enable OEMs to provide new offerings for their customers. Partnerships and scale are essential to winning over the long term in automotive as demand for robust connected car and autonomous driving solutions increases at a rapid pace. This transaction will bring HARMAN and Samsung’s complementary strengths together to accelerate innovation in this space. More broadly, this investment underscores the strength of HARMAN’s employees, as well as our success and leadership across our markets. We look forward to working together with Samsung to elevate experiences for consumers worldwide.”
As reported in the Wall Street Journal, HARMAN, an audio pioneer company that dates back to 1953, has in recent years pushed aggressively into the automotive world under Dinesh Paliwal, and has secured billions in new business, including major contracts with General Motors Co. and Fiat Chrysler Automobiles NV. The aforementioned financial figures tell the story, including the order backlog of approximately $24 billion, more than three times annual revenue, and about two-thirds of its current sales come from auto makers.
Yet what exactly does this mean for the Pro AV side of HARMAN? Why should this be unclear while definitive statements concerning automotive and connected services are very apparent in terms of forefront discussion? It’s no doubt that Samsung’s strong interests lie in what the consumers demand these days – which is essentially automotive innovation and enhancement to go along with mobile device strategy and development. The “smart home” is of course huge discussion which grows by the day (CES is less than two months out now where both Samsung and HARMAN will appear), and businesses continue to explore commercial connected technologies and services as an option. HARMAN will of course show consumer audio products there as well.
The HARMAN Pro Audio technology environment is strong, and for Samsung to not give this its serious due would certainly be ignorant, especially since Samsung has its own AV strength in display technology. I don’t believe there is any reason to read through what’s on the surface here in questioning the status of AMX – at least not just yet, though many have wondered about AMX as a part of the HARMAN environment from the beginning of that acquisition.
Finally, it’s been reported that upon closing, HARMAN will operate as a standalone Samsung subsidiary, and continue to be led by Dinesh Paliwal and HARMAN’s current management team. Samsung is pursuing a long-term growth strategy in automotive electronics, and plans to retain HARMAN’s work force, headquarters and facilities, as well as all of its consumer and professional audio brands. Samsung believes the combination will increase career development and advancement opportunities for the employees of both companies.
Samsung’s Automotive Electronics Business Team, which was established in December of 2015 to identify opportunities for Samsung in the automotive sector, will work closely with the HARMAN management team to realize the full growth potential of the combination.
The transaction, which is subject to approval by HARMAN shareholders, regulatory approvals and other customary closing conditions, is expected to close in mid-2017.
Here is the big picture of Samsung and HARMAN specified growth opportunities *: