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acquisitions

Why Samsung Paid About $8 Billion for HARMAN: A Bet on Connected Cars

Samsung’s HARMAN acquisition was not a bet on building cars. It bought an established automotive-electronics supplier to accelerate its connected-car ambitions.

By TheFinanceBase Team 5 min read
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Samsung’s HARMAN deal was a bet on automotive electronics, not a purchase of a carmaker. Samsung announced the $112-per-share cash acquisition on November 14, 2016, at an approximate $8 billion equity value; it completed the transaction on March 10, 2017, in the United States. HARMAN brought established automaker relationships, vehicle systems and a large automotive business. Samsung aimed to pair those assets with its displays, chips, connectivity and consumer technology.

The deal in numbers

Item Detail
Announcement November 14, 2016
Buyer and target Samsung Electronics, through Samsung Electronics America, acquired HARMAN International Industries
Offer $112 cash per HARMAN share
Announced value Approximately $8 billion in equity value
Final disclosed transaction value Approximately $8.0207 billion, including payments related to HARMAN equity awards
Premium at announcement 28% above HARMAN’s November 11, 2016 closing price; 37% above its 30-day volume-weighted average price
Funding Samsung said it expected to use cash on hand; its final disclosure described funding through a Samsung capital injection
Completion March 10, 2017, U.S. time; March 11 in Samsung’s Korean release
HARMAN before the deal Approximately $7 billion in trailing-12-month sales, about 65% automotive-related, and approximately $866 million in trailing-12-month EBITDA, as reported in 2016 transaction materials
Automotive backlog Approximately $24 billion as of June 30, 2016; backlog was awarded business, not guaranteed revenue or profit

Samsung described the offer terms and premiums in its November 2016 announcement and transaction filings. Its final disclosure put the value at approximately $8.0207 billion. See Samsung’s transaction disclosure and final transaction update.

What Samsung bought

HARMAN was an automotive and audio-electronics supplier, not a vehicle manufacturer. Its automotive business provided embedded infotainment, telematics, connected safety and security, cybersecurity, software and over-the-air updates, as well as in-car audio and sound management. The company also sold consumer audio products, supplied professional audio equipment and services, and operated connected-services businesses.

HARMAN’s existing automotive programs and relationships mattered as much as its products. At the time of the offer, the company said automotive made up roughly 65% of its trailing-12-month sales and reported a roughly $24 billion automotive backlog as of June 30, 2016. Those figures indicated scale and awarded work, but they did not establish when revenue would arrive, the margin on that work or whether every program would be completed as planned.

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HARMAN’s transaction materials said more than 30 million vehicles had been equipped with its audio or connected-car systems. At closing, Samsung used a more conservative formulation: more than 25 million automobiles on the road with HARMAN audio and connected-car systems. These are figures stated at different points in the transaction, not a single comparable measure. The announcement’s product and business rationale is set out in the SEC-filed transaction exhibit.

Audio was important, but not the whole thesis

HARMAN owned well-known consumer and professional audio businesses, including Harman Kardon, JBL, AKG, Infinity, Lexicon, Mark Levinson and Revel. Those brands expanded Samsung’s position in premium audio. But a consumer-audio-only reading misses the central strategic attraction: HARMAN’s automotive systems, software capabilities, engineering organization and access to automaker programs.

Why Samsung wanted a place in the car

Before the acquisition, Samsung was already strong in smartphones, displays, memory and other semiconductors, consumer electronics and connectivity. It did not have HARMAN’s comparable automotive installed base and direct automaker relationships. Cars offered a way to put Samsung technology into vehicle platforms and to build longer-running business-to-business supplier relationships, rather than depending only on consumer-device upgrade cycles.

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This was an expansion of an existing initiative, not a sudden first move into automotive. Samsung established an Automotive Electronics Business Team in December 2015 to identify opportunities in the sector, according to the transaction materials filed with the SEC. HARMAN gave that effort an operating business with customers and programs.

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Why acquire HARMAN instead of building from scratch?

Automotive suppliers must win design programs, qualify components, validate systems for vehicle use and meet demanding production and safety requirements. Automaker relationships and product launches are built over long cycles. Samsung could contribute technology, but replicating HARMAN’s customer base, engineering capability and program experience organically would likely have taken years.

Buying HARMAN therefore offered speed and credibility: an established supplier platform, existing automotive work and a substantial backlog. That is the strategic case for paying a premium. It is not proof that the premium would be earned back; the investment depended on future execution, growth and any benefits from combining the businesses.

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The connected-car vision—and what it did not guarantee

Samsung and HARMAN described a prospective platform combining HARMAN’s infotainment, telematics, sound management, connected services and automotive relationships with Samsung’s displays, semiconductors, mobile technology, connectivity, security and user-interface expertise. The companies’ announcement and their transaction proxy materials presented possibilities such as connected cockpits, digital instrument clusters, head-up displays, rear-seat entertainment, cloud and data services, driver-assistance systems, cybersecurity and over-the-air software updates.

The broader ambition was to connect experiences across car, home, mobile and work. These were strategic objectives, not evidence that the technologies were integrated immediately at closing or that projected synergies were achieved. Samsung’s 2016 announcement also cited an expectation that the connected-car market would exceed $100 billion by 2025. That was a company-provided forecast made in 2016, not a guaranteed outcome or an independently verified result of the acquisition.

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The deal should not be described as Samsung buying a self-driving-car company. The transaction centered on automotive electronics and connected services. Driver-assistance technology appeared within the companies’ wider vision, but HARMAN’s defining role in the deal was as a supplier of vehicle systems, software and audio.

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What made the deal risky

The premium depended on future value

The offer represented a substantial premium over HARMAN’s unaffected market prices. Samsung was paying not only for existing earnings and assets, but also for anticipated growth and strategic benefits. The available transaction figures do not by themselves establish whether those expectations ultimately justified the price.

Automotive work takes time

Design wins, qualification, safety validation and vehicle production schedules can stretch over years. That long cycle can support durable supplier relationships, but it also delays the realization of new programs and makes results dependent on execution. A large backlog is neither cash already collected nor a guarantee of a particular profit.

Automakers have leverage

Vehicle manufacturers can put pressure on suppliers over price, quality, delivery and contract terms. HARMAN’s scale and backlog gave Samsung a foothold, but they did not remove the commercial risks of serving powerful OEM customers.

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Integration had to balance cooperation with continuity

Samsung’s consumer-electronics pace and HARMAN’s automotive-supplier model serve different product timelines and customer requirements. Samsung said HARMAN would remain a standalone subsidiary, a structure that could help preserve customer trust and operating continuity. It could also make it harder to combine technology, sales channels and organizations quickly. The transaction sources do not quantify how that balance affected results.

Connected vehicles make security an ongoing obligation

Connectivity and over-the-air updates can add features after a vehicle leaves the factory, but they also make software maintenance, vulnerability response and data protection important throughout the vehicle’s service life. Cybersecurity was part of HARMAN’s capabilities and the deal rationale; owning those capabilities did not eliminate the risks or responsibilities involved.

What happened when the deal closed

Samsung completed the acquisition on March 10, 2017, in the United States; its Korean completion release was dated March 11. HARMAN became a wholly owned Samsung subsidiary, and its shares were delisted from the New York Stock Exchange. At closing, Samsung said HARMAN would retain its roughly 30,000 employees, headquarters, facilities, leadership and major consumer and professional audio brands, while operating as a standalone subsidiary. Details appear in Samsung’s U.S. completion announcement and global completion release.

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