Deals

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Samsung Electronics Inc. really has a thing for cars.

While Apple Inc. is reported to have scaled back its auto ambitions, the South Korean company is doubling down. First it was interested in buying bits of Fiat Chrysler Automobiles NV's Magneti Marelli autoparts business for more than $3 billion. Now it's written an $8 billion check for Harman International Industries Inc., by far the largest purchase the company has made.

Easy Listening
Samsung's $8 billion cash purchase of Harman International is its largest to date
Source: Bloomberg
Note: Includes acquisitions and investments for Samsung Electronics Co.

Harman is best known for luxury audio, yet it actually gets 45 percent of revenue, and 49 percent of operating income, from its connected car business, which provides what the company calls "embedded infotainment" and telematics to the likes of Porsche, Mercedes-Benz and Toyota.

In that context, and given Samsung's predilection for the auto business, scooping up a handful of top-end audiophile names including Bowers & Wilkins, Harman Kardon and JBL looks like icing on the cake. In fact those brands, which fall under its lifestyle audio division, command 41 percent of the branded car audio market, executive David Lim told a Wells Fargo conference last week. And they're roughly as profitable as Samsung's existing businesses.

The $8 billion cash Samsung is paying looks like a good use of the more than $70 billion in liquidity  the company had on its balance sheet as of six weeks ago, while the premium is well within the norms one might expect: The transaction price is 28 percent higher than Friday's New York close, following a slow rise in the stock over the past 10 days. If you take the average over the past six months, you get a 36 percent markup. That's lower than the 43 percent average for technology deals valued at $5 billion or more in the past two years.

Synergies aside, Samsung is buying a company that has a 15 percent return on common equity. That tops the acquirer's 10.2 percent,  without taking into account any hit Samsung is about to take on those disastrous Note 7 and washing machine recalls.

Profitable Purchase
Samsung is buying a company that has a higher return on equity than itself
Source: Bloomberg
Note: Samsung fiscal year ends Dec. 31, Harman's ends June 30.

Samsung's push to diversify becomes even more compelling in light of its recall troubles. That executives could negotiate this deal while dealing with a major crisis elsewhere shows the company is looking past the short-term drama to build a long-term future. If it can execute the takeover correctly, there's every reason to believe it'll be music to shareholders' ears.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Samsung defines this as: Cash and cash equivalents, short-term financial instruments, short-term available-for-sale securities, long-term time deposits.

  2. These metrics are for the quarter ended June 30, the latest for which data on both companies are available.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net