By Jonathan Cheng
Samsung Electronics Co. agreed to pay $8 billion for U.S. auto-parts supplier Harman International Industries Inc., using its biggest acquisition ever to boost its position in the race among technology companies to shape the future of the car.
The South Korean electronics giant said Monday it would pay all cash for Stamford, Conn.-based Harman, an audio pioneer that dates back to 1953 but in recent years has pushed aggressively into the automotive world.
The deal reflects accelerating innovation in the global automotive supply chain. It instantly makes Samsung a major player in car technology, and pushes its complicated relationship with Apple Inc. and Google parent Alphabet Inc. -- the South Korean company is both a partner and a rival to both -- into a new arena. The three tech giants all are positioning themselves to be major players in car technology, using differing strategies, as are tech upstarts such as Tesla Motors Inc. and Uber Technologies Inc. as well as traditional auto companies.
Alphabet has been testing software that enables cars to drive themselves, using modified Lexus SUVs and its own prototype vehicles built with help from auto suppliers including German mega-supplier Robert Bosch GmbH. The Google cars have driven a total of more than 2 million miles, gathering data to refine performance and safety.
Apple has been working on buildingits own electric, self-driving car, in a secret initiative code-named Project Titan. This summer, after a number of stumbles, the company assigned Bob Mansfield, a veteran Apple executive, to take over and he subsequently shut some elements of Titan, The Wall Street Journal reported in September, leaving Apple's exact strategy a mystery.
Samsung, which has taken a $5 billion hit this year for recall expenses and lost sales on its now-scrapped fire-prone smartphone, is positioning itself as a major supplier of components for the future car. It doesn't plan to make cars itself, but 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.
"We think technology is more critical than being in the metal-bending business," Young Sohn, Samsung's strategy chief, said in a September interview. "If Apple wants to build cars, we want to be their supplier; Detroit, too. Anybody."
Harman, perhaps best known for its Harman Kardon speakers and other audio gear, also has diversified under Chief Executive Dinesh Paliwal into software development and components for connected cars. 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.
Harman, which had revenue of $6.9 billion in its last fiscal year, has secured big new contracts with General Motors Co. and Fiat Chrysler Automobiles NV. It has projected an order backlog of $24 billion. About two-thirds of its current sales come from auto makers.
Mr. Paliwal 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 in a statement.
"Strategically, this is a very big play for Samsung," said Mark Boyadjis, an analyst for research firm IHS Markit. "Samsung will get an instant and significant head-start into monetizing the automotive industry with Harman as a subsidiary." IHS Markit estimates the market for automotive hardware for infotainment, telematics, acoustics and display systems will soar to $61 billion in 2022 from $42 billion this year.
The technological revolution in cars has also driven changes in the chip sector, with Qualcomm Inc. last month agreeing to pay $39 billion for NXP Semiconductors NV, the world's largest developer of chips for automobiles.
Auto makers rely on suppliers for an increasing amount of technology in their cars. Samsung knows this well, as it serves as a provider of costly and complex lithium-ion batteries to Nissan Motor Co. and several others. It is also the world's biggest producer of memory chips that go into virtually every consumer electronics product.
The acquisition of Harman is a rare big deal for a sprawling company that has long preferred to develop its own technologies in-house.
Samsung's third-generation heir Lee Jae-yong has sat on the board of directors of Exor SpA, the controlling shareholder of Fiat Chrysler, for the past four years, and Samsung last year assembled a task force to look into different ways to jump into the automotive world.
But after looking at how long it would take Samsung to build up those capabilities internally, executives decided 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.
Under the deal, which is subject to approval by Harman shareholders, Samsung will pay $112 a share in cash for Harman, which will be an independent subsidiary of Samsung. That is 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. Harman's shares traded up 25% Monday afternoon at $109.71.
Samsung's previous 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 big deals, 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 in Detroit and Tim Higgins in San Francisco contributed to this article.
Write to Jonathan Cheng at email@example.com
(END) Dow Jones Newswires
November 14, 2016 16:07 ET (21:07 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.