As Tom Taulli posted yesterday, Harman International Industries, Inc. (NYSE: HAR) is in play. According to the New York Times [registration required], KKR and The Goldman Sachs Group, Inc. (NYSE: GS) announced an $8 billion bid -- a 17% premium over Wednesday's closing price -- to take HAR partially private.
And there's the rub. I mean stub -- because rather than take the entire company private, as is the normal procedure, the proposed takeover would leave up to 27% of the equity traded publicly (e.g., the stub).
There are three reasons this deal caught my eye:
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I think the company makes great speakers -- a nice pair of which came with my computer.
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I recommended HAR in my newsletter last September 30, and it went from $83.44 to $99.91 by the end of the year, a 20% gain.
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As I posted recently, CEOs with short tenures have gotten some nice going away presents. This includes HAR -- which fired its CEO, Doug Pertz, in August 2006 after four months in office -- paying him $3.8 million to go away.
But the structure of this deal is also telling us something about the state of private equity these days. Many companies are balking at being taken private because public shareholders feel that they are giving away the upside to private equity firms. KKR is trying to buy the votes of these public shareholders by keeping a portion of their interest public.
It's not obvious that stubs really align the interests of the public shareholders and the private equity firms. Here the stub's three Ls for public shareholders:
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Lock up. Private equity deals often take several years to realize a profit, and investors must hold their shares in the interim.
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Losses. Not all deals make a profit, leaving buyout firms and stub holders with a loss.
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Lack of control. The public shareholders would have little say in the business -- leaving private equity holders in control.
With HAR trading at $122.50 this morning -- above the $120 in cash that KKR and Goldman offered -- it's clear that investors expect a bidding war.
Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs or Harman.
