Harman/Levinson/Proceed/Lexicon/Revel/ Deal Busted

Something "fell off a cliff" with Q4 earnings which were 25% below expectations. There is a slight delay in the launch of a new line of Mercedes (with Harman stereos going in them), but given that Hyundai, Peugeot, and others are lining up to get Harman integrated systems in their top-of-range models it should not be a real problem. And given that there is a $225mil termination fee that the would-be-buyers would have to pay to walk away, I would expect the due diligence done would have been good enough to get to the "questions of Harman's financial health" (especially given no debt and $500mil free cash flow per year and OEM mfg capacity booked out for a year-plus). It'll be interesting to see what it is...

The MAC was the inability of the buyout firms involved to obtain appropriate financing due to the recent structural changes in the credit markets.

Private Equity has kind of worked like flipping houses in an up market....many players with no intention of remining as owners for any significant length of time...i.e. many speculators that should not be in the market and who are just looking for a quick gain. The "adverse development" is that, in future, it looks less and less likely if there will be buyers left to flip stuff to (at ever more inlfated and ridiculous prices....)

It's the credit crunch. KKR didn't like the terms the bank was offering to finance the debt. In addition, KKR doesn't want to be holding a luxury manufacturer in a slowing/tightening economy.

Most private equity firms want to close their deals in this environment because the economy is still fairly robust and the corporate world outside of the housing industry is still doing quite well. On the other hand the banks that made firm financing commitments to fund these buyouts on economic terms that are now only worth 90 cents on the dollar require that they perform on their commitment and take on average a 10 cent loss per $ of financing, or try to find a way out of an MAE or MAC clause that is generally very tightly written.

In the case of Harman this is the first big deal where it just so happens that the highly reputable firm, Goldman Sachs, is playing the role of both equity investor, along with KKR, and financing source. A potential conflict of interest? Why would Goldman's private equity managers want to force a 10 cent loss on the Goldman leveraged buyout financing bankers? Harman did announce a weak 2nd quarter but is that enouch to wiggle out of the deal? Anticipate lots of litigation if Harman's board exercises it fiduciary obligation to it's shareholders with a stock price down over 25% on yesterday's announcement.

From an audio perspective this can only be good news. I cannot imagine a set of circumstances where a leveraged recap like this would be of benefit for product innovation and maintaining high levels of customer service.