Merger arbs are a key part of the M&A ecosystem. Basically, these are traders who assume the risk of buying shares in M&A targets, hoping to make a profit when the deals close.
Of course, during the boom times, this was a nice profit center for Wall Street.
In fact, according to a piece in the Wall Street Journal [subscription], it looks like merger arbs are thinking in terms of worst-case-scenarios. As a result, the spreads on deals (the difference between the buyout offer and the current stock price) have widened significantly, even for marquee deals.
Unfortunately, if some of these deals crater, we are likely to see real damage. That is, it will likely take quite some time for the private equity marketplace to make a comeback.
When KKR and Goldman Sachs walked away from the $8 billion buyout of Harman (NYSE: HAR), it looked like there would be a massive legal fight.
But that's been cleverly avoided. KKR and Goldman have agreed to buy about $400 million in Harman's convertible debt. The conversion rate is $104, which means that there is hope that the stock will make a comeback (the current stock price is about $86).
More importantly, KKR and Goldman will avoid paying a $225 million break-up fee.
True, it's not perfect. But, then again, this is a compromise, right? A legal fight would a big drain, in terms of money and time. Besides, this agreement is a sign of a new trend in private equity – that is, making minority investments. With a lack of big-time financing, it looks like private equity firms may have no other choice.
This will begin to seem like a broken record now. KKR and Goldman Sachs (NYSE: GS) are close to either renegotiating or walking away from a deal to buy Harman International (NYSE: HAR), the big audio components company (check the name on your computer speakers). According to The Wall Street Journal, due to "a credit crunch and lackluster financial results from Harman, KKR and other investors in the deal have soured on the transaction."
Most buyout deals have clauses that say that if a company's fortunes go through a "material change," buyers can back out. But operating income at Harman in the June quarter was over $81 million on revenue of $911 million. Not as good as some quarters in the past, but hardly a disaster.
The buyout does have a $225 million break-up fee, but Harman's board is likely to insist that KKR and Goldman stay in the deal. The stock trades at about $112 a share, which is well below the $125 offer. Harman traded under $100 before the offer to take the company private was made.
Although KKR's and Goldman's reputations could be harmed by walking on the deal, they may feel that it is better to face this kind of setback than to lose billions of dollars on a company they no longer believe can cover the debt that a buyout would require. But, Harman's board and management are unlikely to be satisfied with that explanation. It is not much to take to their shareholders.
If the transaction falls apart, the odds are very high that Harman will take the two big financial firms to court. And, it may be only the first case among several brought on by a tough credit environment where risk is no longer popular.
Douglas A. McIntyre is a partner at 247wallst.com.
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:
I think the company makes great speakers -- a nice pair of which came with my computer.
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.
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.
Over the past 50 years, Harman International (NYSE: HAR) has built a solid business in stereo and audio equipment. It's so good that KKR and GS Capital Partners have agreed to buy out the company for a cool $8 billion.
Harmon increased sales by 10% to $882.8 million in Q3 and earnings increased from $64 million, or $0.94 per share to $71 million, or $1.07 per share. The company has a variety of brands like JBL and Infinity and has major contracts with auto companies like DaimlerChrylser (NYSE: DCX).
Interestingly enough, Harmon shareholders have the opportunity to convert some of their shares into the private entity (there are 8.3 million shares available for this option). This is something that is fairly rare in the buyout world.
The deal also has a go-shop provision that allows Harmon to seek other bids.
In fact, the Street thinks the bid will increase. Harmon's stock is currently trading at $122.49, which is above the $120 buyout offer.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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Merger arbs are a key part of the M&A ecosystem. Basically, these are traders who assume the risk of buying shares in M&A targets, hoping to make a profit when the deals close. 
Over the past 50 years, 
