On November 14, 2016, the audio industry was shaken to its foundation with the surprising announcement that Samsung Electronics was acquiring Harman International Industries, Inc. for $8 billion, in an all-cash deal - a premium of 28% based on Harman's closing stock price on November 11, 2016. The announcement revealed that the world's largest audio company in both turnover and number of employees was for sale. Better said, Harman's current management was looking for an exit, getting richer while doing it.
Of course, the transaction is still subject to approval by Harman shareholders, regulatory approvals, and other customary closing conditions, and is expected to close in mid-2017. Samsung will use "cash on hand" to fund the transaction and the agreement was announced as being unanimously approved by the boards of directors for both companies. This makes it very likely that a lot of industry veterans from Harman and especially members of the company's management since 2007 will gladly take the money and retire in glory. That's clearly a forward-looking motivation.
The company founded by Sidney Harman and Bernard Kardon, in 1953, already has a rich history of being sold and reacquired. In 2007, just before Dinesh C. Paliwal was appointed Harman's President and CEO, the company was very close to a buy-out by KKR and Goldman Sachs Capital Partners. Shortly after KKR's announcement that it would back out of the deal, Dinesh Paliwal succeeded Sidney Harman as Chairman of the Board. Paliwal had no connections to the audio industry - he transitioned from a successful career as president of US operations for ABB (ASEA Brown Boveri), the Swiss-based industrial powerhouse - and he initiated a period of strong expansion for Harman, moving its industrial operations to Asia and Eastern Europe, and acquiring many other companies.
Harman's foundation was always divided between the consumer/high-end front and professional audio with strong brands such as JBL, Harman Kardon, Infinity, and Revel, on one side and JBL Professional and UREI on the other. Prior to Paliwal's leadership, Sidney Harman used the money raised by its stock offering on the New York Stock Exchange in 1986, to acquire multiple companies. In 1988, Harman acquired DOD Electronics Corp (Digitech) from Salt Lake City, UT, followed by the acquisition of Lexicon and Mark Levison. In the professional audio industry, and throughout the 1990s, Harman acquired some of the most prestigious companies, including Soundcraft, dbx, Crown, BSS, AKG, and Studer. Sidney Harman also acquired British companies Allen & Heath, Orban, Quested, and Turbosound, of which he divested soon after so that Harman could focus on its existing brands and business, including an expanding automotive business. In 1995, Harman acquired German auto radio maker Becker GmbH, one of the strongest suppliers to the European automotive industry, strengthening its international reach and initiating one of its most successful divisions.
Already under Dinesh Paliwal, the acquisitions continued on all fronts: consumer audio, automotive, and professional audio. After acquiring Aha Mobile in 2010, in 2011 Harman acquired MWM Acoustics, a privately held company that specialized in speaker and microphone technology for consumer electronics. Harman also acquired iOnRoad Technologies in 2013, reinforcing its portfolio of automotive technologies. In 2013, Harman decided to include lighting with the acquisition of Martin Professional. Shortly after, Harman announced the acquisition of Duran Audio BV, the recognized Dutch pioneer in steerable columns (Axys Intellivox). In June 2014, Harman acquired manufacturer of fitness headphones Yurbuds and completed the acquisition of AMX, expanding the company's reach to AV control and automation systems. In January 2015, Harman confirmed the acquisition of SM Pro Audio, based in Melbourne, Australia. In March 2015, Harman acquired the automotive division of Bang & Olufsen, and expanded its capabilities around software and services with the acquisitions of Symphony Teleca, from Mountain View, CA, and Redbend, an Israeli-based provider of software management technology for connected devices and over-the-air (OTA) software and firmware upgrading services. With these additions, Harman announced the formation of a fourth division, which it called Connected Services. In March 2016, Harman acquired the automotive cyber-security firm TowerSec, increasing its competencies in the automotive cyber-security field.
Now with approximately 28,000 employees worldwide, of which approximately 7,000 are in US, Harman International Industries is a very different company from what it was 30 years ago. Harman reported sales of $6.4 billion during the 12 months that ended September 30, 2015.
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Harman Professional's new Technology Center in Salt Lake City, Utah. |
I have commended the company's results in previous editorials and the fact that Harman established one of the strongest research and development teams in the audio industry, offering major contributions to nearly every single field of audio innovation in the last decades. With a focus on major growth areas, such as automotive, clearly providing the financial results (approximately 65% of Harman's reported sales during the 12 months ended September 30, 2016 are automotive-related - with sound systems for cars, representing 32%, specifically), Harman's management also reflected a detachment between recent strategies and its Asian manufacturing focus from the company's brands and market foundation in the US and Europe.
The automotive division and Harman's clear leadership in car technologies are now the core of its business, in particular since the Symphony Teleca and Redbend acquisitions, adding more than 8,000 engineers. When Harman agreed to pay almost $1 billion for Symphony Teleca and Redbend, Dinesh Paliwal said, "The two companies change the DNA of our company." With the acquisition of AMX, Harman also refocused its R&D efforts into Connected Services, the IoT market, and the next generation of cloud-based consumer and enterprise experiences.
The consumer audio market is probably the area that benefited the most from the existing strategy, with a strong portfolio of brands and technology for wearables, hearables, voice personal assistants, and emerging applications, such as augmented reality. The professional systems is where I feel Harman is facing bigger challenges, with increasing competition in all price and application segments and most of its brands loosing momentum in the last few years.
For Samsung, there was a clear motivation for the decision to acquire Harman. As stated in the acquisition announcement, Samsung wanted to gain a significant presence in the Connected Car market and Harman also provided clear value in key areas of Samsung's business. Automotive electronics has been a strategic priority for Samsung, and is clearly complementary to its semiconductor and mobile business. There is nothing to criticize there, since there was a willingness from Harman to sell.
But that's where the backward-looking perspective starts for me. Harman's growth and leadership in the audio industry is the result of a strong emotional attachment created throughout the years in the market with its brands. In fact, that's the reason why JBL or AKG are still more valuable to users and consumers than Harman as a brand. The audio industry tends to create strong foundations based on close relationships with clients and the distribution chain. That's why - even in today's market where companies need to scale to leverage global opportunities - smaller and focused companies do so well. In recent years, we have seen several examples of new companies entering the space of Harman's renowned brands and gaining leadership.
There was a value on Harman's recent strategy in the integrated systems approach, and that's what explains the decision to acquire AMX or Martin Professional. Still, the attempt to expand into lighting with Martin is probably the biggest example of brand devaluation and detachment from the channel partners, creating a vacuum that effectively eliminated a market leader from the entertainment sector and virtually erased the brand. Martin Professional was a much more valuable business on its own.
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"As self-driving vehicles and advanced driver-assist technologies surface on our roadways, our society has an opportunity to make the United States a leader in smarter and safer transportation options," stated Gary Shapiro, president and CEO of the Consumer Technology Association (CTA).
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The combination of Harman's brands and audio capabilities with Samsung doesn't add any value, even if there might be industrial and technological synergies to both parts. I believe Harman could do much better on its own, and I am afraid that any of the audio brands could be better off as well. The resulting Harman could effectively complement very well the automotive strategy that Samsung Electronics says it has been pursuing for some time. I fully understand Samsung's motivations to directly compete with Apple and Google in that space and this acquisition effectively places the South Korean company at the core of the transition to connected vehicles. But I fear for what Harman effectively represents to consumers.
Samsung's announcement states that upon closing of the acquisition, Harman will operate as a standalone Samsung subsidiary, led by Dinesh Paliwal, while Samsung follows its long-term growth strategy in automotive electronics. Samsung also stated that it plans to retain Harman's work force, headquarters, and facilities, as well as all of its consumer and professional audio brands.
I don't think this will work. Quoting from Harman's company history, Sidney Harman credited the prosperity of his companies to the success of a strategy that emphasized three tactics: 1) all of the company's products were built in factories that it owned, rather than purchased from companies that were contracted to manufacture the goods for Harman; 2) Harman International vigorously marketed all of its products globally; and 3) the company honored its employees and treated them with respect.
