Samsung Electronics Co Ltd (005930:KSE) – market cap as of 18/11/2016: $188.98bn (KRW223.117tn)

Harman International Industries Inc. (HAR:NYSE) – market cap as of 18/11/2016: $ 7.622bn

Introduction

On November 14, Samsung Electronics Co. announced the acquisition of Harman International Industries Inc. for a total equity value of approximately $8bn, and a value per share of $112 entirely paid in cash.

The deal represents Samsung’s decision to diversify its risk away from the declining smartphone business and enter the automotive technology market, in competition with giants like Google and Apple. The acquisition allows Samsung to leverage on the Connecticut-based audio system manufacturer’s know-how and offer premium- connected auto services. The deal is expected close by mid-2017.

Samsung Electronics Co.

Samsung Electronics, founded in 1969 and headquartered in Suwon, South Korea, represents the crown jewel of the Samsung Group. It is comprised of 159 subsidiaries across the world responsible for sales and production, and it leads the global market in high-tech, electronic manufacturing and digital media. It operates through three main business lines:

– Information Technology & Mobile Communications – mainly producing smartphones and tablets;

– Consumer electronics – focusing on visual displays, digital appliances, printing solutions and medical devices;

– Device solutions – responsible for semiconductors and memories.

In FY 2015 Samsung reported an EBIDTA margin of 24.41%, consolidated revenues of KRW200tn with a negative CAGR of -2.69% from FY 2014, and an operating profit of KRW26tn with a CAGR of 5.54% from the prior year. These numbers reflect the global economic headwinds, including the sharp fall in oil prices that affected the company’s fourth quarter earnings. That is why, as planned, Samsung made efforts to secure profitability for each of its pre-existing business units, while also focusing on reinforcing medium to long-term business competitiveness through expansion into new business areas.

Harman

Harman International Industries is the global leader in connected car technology, lifestyle audio innovations, design and analytics, cloud services and IoT solutions. It was founded in 1980 by Sidney Harman and Bernard Kardon, and is now headquartered in Stamford, Connecticut. Harman has developed, both internally and through a series of strategic acquisitions, a wide product offering. The company is organized in four distinct segments:

– Connected Car – focusing on the design of connected car systems to be installed primarily as original equipment by automotive manufacturers;

– Lifestyle Audio – complementary to the connected car systems;

– Professional Solutions – producing an extensive range of audio, lighting and video solutions for entertainment and enterprise applications;

– Connected Services – creating software solutions to bring the benefits of the connected world to the automotive, retail, mobile, healthcare, media and consumer electronics markets.

In FY 2016, revenues reached a record high of $6.91bn, an increase of 12% compared to the prior year, while operating income increased to $580m. EBITDA rose by 26% to $804m and the company registered and EBITDA margin of 11.63% and EPS of $4.99.

Industry overview

The Tech and Automotive Supplier Industries were deeply affected by a revolutionary M&A trend. In fact, software and electronics are playing an increasingly important role in the making of vehicles and, according to Samsung, the market for automotive electronic components is projected to grow to over $100bn by 2025. In this dramatic transformation of the Automotive Supplier landscape, tech giants seem to be approaching the market in different ways. While Silicon Valley firms, such as Apple and Google, appear to be attracted by investments on self-driving cars, Samsung’s initial focus is more hardware-oriented and this could prove to be a less risky and more lucrative move in the short-term. This $8bn deal may lead to other tie-ups in the industry, with Wells Fargo’s David Lim saying that this move may cause more and more acquisitions, following the cars’ tendency to become extremely high-tech.

Deal structure

After months of negotiations, Samsung has agreed to acquire Harman using part of its $64bn cash on hand to finance the transaction. Samsung will buy Harman’s shares at $112 each. The price represents a premium of 27.8% with respect to Harman’s closing share price of $87.7 on November 11, the last day of trading prior to the announcement. The deal involves a 100% acquisition of Harman for a total equity value of $8bn. It is yet unclear if and how Samsung will support Harman’s existing debt, the rating of which has been put under review for upgrade by Moody’s following the transaction announcement.

The deal has been approved by the board of directors of both companies, but it is still subject to Harman shareholders’ approval. The deal status is still pending as it will also have to demonstrate compliance with the regulatory framework – the Hart-Scott-Rodino Antitrust Improvements Act and the Committee on Foreign Investments in the United States. Cooperation between the companies and the regulators will be required to guarantee a smooth execution of the transaction. After completion, Harman will operate as a subsidiary of Samsung and will continue to be led by its current management team, as Samsung plans to retain the target company work-force in its ambitious project to expand in the automotive electronics business segment.

Strategic Rationale

On November 14, Oh-Hyun Kwon, Vice Chairman and CEO of Samsung Electronics, declared that the $8bn acquisition of Harman would give Samsung a significant presence in the rapidly growing market for connected technologies and automotive electronics, which is expected to reach $100bn in value within the next 10 years. The deal is not driven by cost synergies: its rationale relates more to Harman’s top positioning in the field of connected cars and to the potential benefits that this acquisition would bring to Samsung Electronics.

Indeed, Harman would bring to the table its expertise in sophisticated in-vehicle technologies and its established business relationships with large automakers, giving Samsung the opportunity to use at best its know-how in connected mobility, semiconductors, user experience and displays. In addition, Samsung sees strong growth opportunities through the combination of its global distribution network with Harman’s leadership as a global Tier 1 supplier to OEMs (Original Equipment Manufacturers).

From a strategic standpoint, both companies’ management teams expect the deal to bring about: (i) larger revenue in the automotive business, through the combination of Harman’s leadership in connected car technologies and Samsung’s strength in connectivity technologies; (ii) enhancement of Samsung’s audio and visual experience for users thanks to Harman’s leading brands and audio systems; (iii) improvement of the cloud-based experience after Samsung will be introduced to Harman’s 8,000 software specialists; (iv) delivery of audio and visual professional solutions for stadiums, concert facilities and the like.

Finally, the deal is expected to be immediately accretive for Samsung shareholders.

Market reaction

On November 14, day of the announcement, Harman’s share price skyrocketed, recording a 52-week high of $110.85. On the other hand, Samsung’s share price was not significantly impacted by the announcement, closing at +0.19%. Overall, this suggests that investors and traders are confident that the deal will smoothly close.

Advisors

JP Morgan and Lazard are advising Harman International Industries, while Evercore is the sole advisor to Samsung. Additionally, JP Morgan provided the fairness opinion to Harman’s board.

[edmc id= 4397]Download as PDF[/edmc]


0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *