bloggingbuyouts

Wall Street has its own brand of breaking up. There may not be 50 ways but there are at least two -- the easy way and the hard way. According to the New York Times, KKR and The Goldman Sachs Group (NYSE: GS) are splitting with Harman International (NYSE: HAR) the easy way, while J.C . Flowers is taking the hard route to killing its deal with SLM Corp (NYSE: SLM).

The easy way, in the Harman case, is for the buyers to buy $400 million worth of Harman bonds instead of paying $8 billion to own the company. Under the new agreement, the buyout deal struck in April will be dissolved, with no litigation or payment of the $225 million termination fee. Instead, KKR and Goldman will buy bonds that can be exchanged for Harman shares at $104, below the $120-a-share price of the original offer -- but much higher than its current $85.87.

Harman gets some cash and saves face while KKR and Goldman get out of investing in a cratering company -- HAR's earnings of 50 cents a share for the most recent quarter are expected to be less than half of the $1.02 analysts had forecast.

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.

Harman (NYSE: HAR) put volatility Elevated as hedge if KKR & Goldman Sachs do not complete deal. HAR, a manufacturer of audio products and electronic systems, announced on April 26 it would be purchased by KKR and Goldman Sachs Capital Partners for $120 a share in cash. The deal is expected to be completed in the fourth quarter. HAR is recently trading at $100 in pre-open trading, below its close of $112.25. The Wall Street Journal says "The private-equity buyers of HAR are balking at completing the $8 billion purchase of the audio-equipment maker, people familiar with the matter said." HAR January call option implied volatility is at 11; puts are at 20; above its 18-week average of 13 according to Track Data. Elevated put implied volatility suggests funds are hedging their position in HAR in case the deal doesn't close. Puts are contracts that give the right to sell a stock at a certain price in the future.

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.