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Harman Settles With Ex-Suitors

10/22/2007 11:47:00 AM Eastern

Washington — Kohlberg Kravis Roberts and Goldman Sachs avoided a lawsuit by Harman International when they agreed to buy $400 million in convertible senior notes that Harman will use to repurchase Harman common stock.

Both sides also agreed to terminate their merger agreement “without litigation or payment of a termination fee,” Harman said.

The announcement followed a decision by KKR and Goldman Sachs to back out of their plan to take the company private in an acquisition valued at about $8 billion. The two investors claimed they were under no obligation to complete the planned merger, announced in April, because of "a material adverse change" in Harman’s business and because Harman breached the merger agreement, a Harman statement said at the time. Harman disagreed with both contentions.

As part of the latest agreement, KKR and Goldman agreed to buy 1.25 percent senior notes “convertible under certain circumstances” into Harman common stock, Harman said. The two ex-suitors also said they won’t sell or hedge their position for at least one year, Harman stated.

“Although we do not agree with the reasons for cancellation of the original merger agreement,” said Harman executive chairman Sidney Harman, “we view this $400 million investment as a vote of confidence in our business and its prospects for continued growth.”

The settlement, added Harman CEO Dinesh Paliwal, “enables us to move forward in a decisive manner to implement our initiatives to ensure the long-term growth of the company and avoid the time, cost and distraction of litigation.”

Shortly after KKR and Goldman announced plans to withdraw from the merger, Harman projected that first-quarter 2008 revenues would hit $950 million, up about 15 percent from the year-ago quarter, and that operating profit would drop to about $40 million, down by more than half from the year-ago quarter’s $86.9 million. For the full fiscal year, Harman estimated sales would jump about 15.5 percent to $4.1 billion from $3.55 billion, and operating income and diluted earnings per share before merger-related costs will “equal or exceed last year’s record performance,” the company said. In fiscal 2007, operating income hit $397 million, and diluted EPS before merger costs was $4.14.