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Buyout firms cancel takeover of Harman

September 22, 2007|From the Associated Press

WASHINGTON — Two private equity firms backed out of their $8-billion buyout of upscale audio equipment maker Harman International Industries Inc. on Friday, marking the latest such deal to run into trouble amid tightening global credit conditions.

Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc.'s private equity unit told Harman they were under no obligation to complete the merger because "a material adverse change in Harman's business has occurred," Harman said.

Harman, whose audio equipment brands include Infinity, JBL and Harman Kardon, said it disagreed with those assertions but did not make clear what action, if any, it would take.

Investors punished the stock as word got out that Kohlberg Kravis Roberts and GS Capital Partners were attempting to nullify the deal. By the end of the day, Harman shares had plummeted by more than 20%.

A person familiar with the negotiations, who asked not to be named because he was not authorized to speak publicly, said the private equity firms sought to quash the deal because of questions about Harman's financial health and not because of any financing difficulties in a tight credit market. The person said the effort to back out was not a negotiating tactic.

Representatives for Kohlberg Kravis Roberts and GS Capital Partners did not return phone calls for comment.

Shares of Washington-based Harman dropped $27.25 to $85. In the last year, the company's stock has traded from $79.98 to $125.13, which it hit after the takeover deal was announced in April. Kohlberg Kravis Roberts and GS Capital Partners agreed to pay $120 a share in cash for Harman, and the audio equipment company's board approved the deal, which was scheduled to close at year's end.

The once-booming private equity industry has stumbled during the last few months as tightening credit conditions have caused investors to balk at funding deals. Buyout firms -- which snap up companies and then take them private -- had grown used to easy credit, and recently have had a difficult time persuading banks to underwrite their takeovers.

Kohlberg Kravis Roberts on Friday was successful in attracting investors to a $5-billion loan used for its acquisition of First Data Corp., however. Reluctance by Wall Street caused the buyout firm to lower the amount of its borrowing, so that it sought an initial $5 billion instead of its original plan of $14 billion.

Cerberus Capital Management in July had to inject more equity into its takeover of Chrysler Group from German parent DaimlerChrysler. More recently, Home Depot Inc. lowered the sales price on its wholesale supply unit 17% to complete its sale to private equity firms.

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