Samsung Electronics Co. is making a drive for control of the
car.
The South Korean smartphone maker said Monday that it would buy
U.S. auto-parts supplier Harman International Industries Inc.,
based in Stamford, Conn., for $8 billion in an all-cash deal that
instantly makes Samsung a major player in the world of automotive
technology.
The deal—Samsung's biggest acquisition in its history—reshapes
the pecking order in the global automotive supply chain, reflecting
a quickening pace of innovation and an increased role for companies
with deep pockets and a keen understanding of mobile services.
Harman, an audio pioneer that dates back to 1953, has in recent
years pushed aggressively into the automotive world under Chief
Executive Dinesh Paliwal, and has secured billions in new business,
including big contracts with General Motors Co. and Fiat Chrysler
Automobiles NV. It has projected an order backlog of $24 billion,
more than three times annual revenue, and about two-thirds of its
current sales come from auto makers.
Harman has also diversified into software development and
components needed to make cars more like smartphones. Much of that
has been done on the shoulders of major acquisitions such as a $780
million deal last year for Mountain View, Calif.-based software
services company Symphony Teleca.
In a statement, Mr. Paliwa said linking up with Samsung would
give the two companies an edge in a competitive field.
"Partnerships and scale are essential to winning over the long term
in [the] automotive" industry, he said.
The acquisition pushes Samsung's complicated relationship with
Apple Inc. and Google parent Alphabet Inc.—the South Korean company
serves as both a partner and a rival—into a new arena. Apple,
Google and technology upstarts such as Tesla Motors Inc. and Uber
Technologies Inc. are all trying to reshape the auto industry and
have been working on self-driving cars.
Samsung will now have a place among names like Denso Corp., a
major supplier to Toyota Motor Co., German mega-supplier Robert
Bosch GmbH and Sweden's Autoliv Inc., a safety-components supplier
that has benefited from troubles caused by rival Takata Corp.'s
air-bag recalls.
The largest auto suppliers boast revenues of $20 billion or more
annually, giving them ample resources to invest in the type of
research and development needed to drive change in the
capital-intensive auto industry.
Auto makers rely on suppliers for an increasing amount of
technology in their cars. Samsung knows this well, serving as a
provider of costly and complex lithium-ion batteries to Nissan
Motor Co. and several others, battling it out with other major
battery makers for several years. It is also the world's biggest
producer of memory chips that go into virtually every consumer
electronics product.
For Samsung, the acquisition of Harman is a rare megadeal for a
sprawling company that has long preferred to develop its own
technologies in-house.
Samsung doesn't plan to make cars itself, according to people
familiar with executives' thinking, but the company sees automotive
technology, and the broader shift toward connected, driverless
vehicles, as a promising growth area to sell more of its
semiconductors, display panels and mobile services.
Samsung's third-generation heir Lee Jae-yong has sat on the
board of directors of Exor SpA, the controlling shareholder of Fiat
Chrysler Automobiles NV, for the past four years, and Samsung last
year assembled a task force to look into different ways to jump
into the automobile world.
But after looking at how long it would take Samsung to build up
those capabilities internally, executives decided that it would be
much faster to make an acquisition, according to people familiar
with the matter, who added that talks with Harman began during the
summer.
As part of the deal, which is subject to approval by Harman
shareholders, Harman will remain an independent subsidiary of the
technology giant. Samsung will pay $112 a share in cash for Harman,
which generated roughly $700 million in net profit on $7 billion of
revenue last year.
The deal offers a 28% premium over Harman's Friday closing price
of $87.65 a share, though it is below Harman's all-time high of
about $145 in April last year.
Samsung's previous record for its largest acquisition was a
two-part, $840 million purchase of AST Research in the mid-1990s.
Samsung sustained heavy losses before ultimately giving up on
Irvine, Calif.-based AST, once the world's fifth-largest computer
maker.
As a result, for nearly two decades, Samsung's top management
remained wary of making big acquisitions, preferring to build
technology by pouring investment into research and development. In
recent months, however, Samsung has turned to deal-making as a way
to instantly build up its capabilities in emerging technologies
such as mobile payments, cloud-based services and artificial
intelligence.
Samsung, which had a war chest of $71 billion at the end of
September this year, has proven its willingness to spend freely to
quickly gain a dominant position in a new industry. In just five
years, it plowed roughly $3 billion into complex biologic drugs,
where it is already one of the world's biggest players.
This isn't Samsung's first try at the automotive industry. In
1994, Chairman Lee Kun-hee launched Samsung Motors, with assistance
from Nissan, before being forced to sell control of the company to
Renault SA after the Asian financial crisis in 1998.
Evercore Partners Inc. advised Samsung, while J.P. Morgan Chase
& Co. and Lazard Ltd. advised Harman.
John D. Stoll contributed to this article.
Write to Jonathan Cheng at jonathan.cheng@wsj.com
(END) Dow Jones Newswires
November 14, 2016 03:05 ET (08:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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