Samsung Electronics (KSE) is making its biggest acquisition ever, paying $112 per share – the equivalent of about $8 billion – for Harman International (NYSE: HAR), a leader in connected cars, consumer audio, pro audio, audio/video distribution and IoT technologies for building automation and the smart home.
In a press release announcing the acquisition, Samsung highlights Harman’s automotive technologies and audio brands (JBL, Harman Kardon, Mark Levinson, AKG, Lexicon, Infinity, and Revel) but says nothing about AMX, the building- and home-automation company that Harman acquired from Duchossois over two years ago.
Samsung’s only vague reference to Harman’s smart home offerings – all of which are deployed by professional integrators in both the residential and enterprise markets – is this:
Connected Services: Samsung will gain access to HARMAN’s 8,000 software designers and engineers who are unlocking the potential of the IoT market. This collaboration will deliver the next generation of cloud-based consumer and enterprise experiences, as well as end-to-end services for the automotive market through the convergence of design, data and devices.
The popular press and financial markets seem to care little about Harman’s automation businesses. The New York Times touts, “Samsung Makes $8 Billion Play in Auto Industry.” Seeking Alpha reports, “Samsung moves into the connected car market.” Forbes opines, “Samsung Splurges On Harman In A Desperate Bid To Catch Up To Apple's CarPlay.”
So what will become of AMX, which in addition to making control systems also produces distributed audio and video solutions?
Samsung and AMX in the Smart Home
Samsung has its own initiatives for the smart home via SmartThings, the mass-market home-automation business acquired in 2014 for about $200 million. Samsung is embedding SmartThings technology in all of its new Smart TVs as well as some major appliances and other electronics.
AMX’s business in the smart home spans more than three decades. For most of those years, the company had been one of the top two home-automation vendors (with Crestron) for the custom-integration channel, but over the past decade AMX has focused largely on the commercial and industrial markets.
After relative silence in the residential channel for the past five years or so, AMX intimated this year it would reinvigorate its home-control business.
Where does AMX fit in?
CEDIA Expo, the leading show for home-technology installers, saw a renewed commitment from AMX in the residential market. After the show, we caught up with Adam Gershon, residential product manager for AMX, who says the company “never left” the residential channel, but hadn’t really introduced any new solutions for that market in the past few years.
The economic collapse around 2008 devastated the home-construction industry, which had fueled AMX’s growth (and the industry’s growth) in past years. Furthermore, the marketplace changed dramatically with the introduction of the iPad, proliferation of smart phones and new competition in the pro-installed smart-home space from the likes of Control4 (Nasdaq: CTRL) and Savant.
“The change in the marketplace plus the housing downturn was a horrible combination for us,” Gershon says.
AMX was “just maintaining, but not growing” the residential business, he adds.
Then along came Harman, with its cash, expertise, thousands of engineers and desire to grow the AMX business.
Today, AMX is part of Harman’s “Professional” division, which includes pro audio. There is also the Lifestyles group, containing Harman’s luxury consumer-audio products comprised of “some custom, but mostly big-box retail” brands, according to Gershon.
The largest division is Infotainment, the group that develops not just car audio but also dashboard and headrest displays for entertainment and telematics.
Harman is the market leader in connected-car solutions, with more than 30 million vehicles currently equipped with its connected-car and audio systems, including embedded infotainment, telematics, connected safety and security. Some 65 percent of Harman’s $7.0 billion of reported sales during the 12 months ended September 30, 2016 are automotive-related.
There’s a fourth division called Connected Services, largely served by Symphony Teleca and Red Bend Software, two cloud-centric software and wireless-development firms Harman acquired last year for a total of about $1 billion.
In particular, Symphony Teleca had roughly 8,000 employees, most of them engineers. Those are the “8,000 software designers and engineers who are unlocking the potential of the IoT market,” that Samsung mentions in its press release.
AMX Set to Leverage Other Harman Groups
Now, you take the Connected Services group and all those new engineers, along with the Harman's cloud initiatives for the automotive market, and you can see some interesting possibilities for the smart home.
In automotive, for example, “voice recognition, big data, analytics … they’re all relevant to residential,” Gershon says.
And then you take these 8,000 new software engineers that provide outsourcing services for such giants as Google, Jaguar and Comcast, and suddenly you have “access to all those resources that have expertise in things like human factors, ethnographic factors, user experience [UX] ….” Gershon says. “There’s a huge potential for resource accessibility we didn’t have before.”
The challenge this year according to Gershon was to build an organization that could facilitate sharing across divisions.
“All those things that we have an expertise in … how do we take those technologies and build it into our [AMX] platform?” Gershon says. “How do we leverage something that everyone else is building? It takes time. It is something we are pioneering within the company.”
For example, Harman now has a “dedicated design team for UX,” says Gershon. “That for sure is something we haven’t focused enough on in the past. We’ve been focused on building black boxes.”
Over the past few years, AMX has “tried to take more ownership of the UX” rather than putting so much of the burden on dealers and their programmers. The initiative was helped with the acquisition of Symphony Teleca, and the results will be revealed in Q1 2017, according to Gershon.
The new AMX Living Platform
At CEDIA, AMX gave us a glimpse of the new AMX Living software, which has been under development for several years. It was always meant to help dealers configure complex AMX systems without complex programming, and to deliver simple, elegant user interfaces (UI) to their clients.
In the past, however, the design tools and UIs were two completely disparate components, making deployment and troubleshooting more difficult than necessary. In the new version, the two will merge into one platform that also includes a rich troubleshooting engine.
So, for example, the integrator can press one button to “analyze the entire system and test everything connected to it,” says Gershon. “When I send a command, I know exactly what to expect as a response from each connected device. If you’re not getting the correct response, then you can dive deeper.”
It is AMX's 25+ years of integrating with smart devices that enables such a feature, according to Gershon: “Part of our value proposition is the [integration] module library we’ve built.”
So in early 2017, AMX will introduce its “revamped solution set” for home systems integrators, says Gershon. “We’ll be better prepared to go back out to the channel and reclaim the residential high-end market.”
On top of that, Gershon told me back in October – certainly before he knew about the impending Samsung acquisition – that AMX had a “strategy laid out taking us beyond” the high-end residential market.
“There are lots of opportunities to take the core of what we do – the smart home, IoT, things we’ve been doing for 20 years – and leverage that for different vertical markets,” he said quite prophetically. “There could be go-to-market strategies that don’t necessarily come from the professional division.”
What Will Samsung do with AMX?
Certainly Samsung has its own development team when it comes to the smart home. Will the electronics giant take an interest in the professional integration market? If so, will it exploit AMX’s expertise in that channel?
Will SmartThings and Artik be able to contribute anything to AMX's high-end smart-home offerings? Like maybe app development and a new embedded IoT platform?
And vice versa: Is there anything that AMX might contribute to Samsung's mass-market home-automation initiatives? Like integration with higher-end subsystems (lighting controls, multiroom A/V, motorized shades, etc.)?
Unfortunately for AMX fans, nothing in Harman's 2016 annual report (year ended June 30, 2016; pdf) — which makes no mention of either AMX or the smart home — suggests much love for residential home controls:
In fiscal year 2016, our Professional Solutions Division embarked on a significant transformation to increase our competitiveness and align our go-to-market strategy with the changing dynamics of the markets we serve. Rather than focus on products and services, we moved to solutions-based selling around two primary sectors – entertainment and enterprise – to leverage what we believe is the most comprehensive portfolio of audio, lighting, video, and control and automation solutions available in the marketplace. … On the entertainment side, our audio and lighting solutions powered major festivals, tours and events ….
In the the three months ended Sept. 30, 2016, Professional Solutions contributed only $11.7 million in operating income, down from $25.7 million in the prior period, on net sales of $240 million and $247.1 million, respectively. On the other hand, Connected Car contributed $95 million in the quarter ended Sept. 30, 2016, on sales of $797.1 million; Lifestyle Audio contributed $78.7 million on sales of $568.4 million.
It's not unreasonable to wonder if Samsung might divest AMX, in which case: who would acquire the company? AMX has been tossed around quite a few times over the past 15 years or so. It was public, then private, then public when it was acquired by Duchossois in 2005, which sold it to Harman in 2014. It's a challenge to think of who might acquire AMX — outside of its own managers — if Samsung chose to divest, but if it looks like that might happen, I'll put my thinking cap on and venture some suggestions.
The Samsung acquisition of Harman, which is subject to approval by Harman shareholders, regulatory approvals and other customary closing conditions, is expected to close in mid-2017.
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Samsung Electronics to Acquire HARMAN, Accelerating Growth in Automotive and Connected Technologies
Korea on November 14, 2016
Samsung Electronics and Harman International Industries, Incorporated today announced that they have entered into a definitive agreement under which Samsung will acquire HARMAN for $112.00 per share in cash, or total equity value of approximately $8.0 billion. Upon closing, the transaction will immediately give Samsung a significant presence in the large and rapidly growing market for connected technologies, particularly automotive electronics, which has been a strategic priority for Samsung, and is expected to grow to more than $100 billion by 2025¹ . HARMAN is the market leader in connected car solutions, with more than 30 million vehicles currently equipped with its connected car and audio systems, including embedded infotainment, telematics, connected safety and security. Approximately 65% of HARMAN’s $7.0 billion of reported sales during the 12 months ended September 30, 2016 are automotive-related, and its order backlog for this market at June 30, 2016 was approximately $24 billion.
HARMAN’s experience designing and integrating sophisticated in-vehicle technologies, as well as its long-term relationships with most of the world’s largest automakers, will create significant growth opportunities for the combined business by enabling it to leverage Samsung’s expertise in connected mobility, semiconductors, user experience, displays and its global distribution channels. In addition, the combination of HARMAN’s brands and audio capabilities and Samsung’s expertise in consumer electronics will deliver enhanced customer benefits and elevate user experiences across Samsung’s complete portfolio of consumer and professional products and systems.
READ THE COMPLETE STORY: Samsung to Acquire Harman for Connected Car; What About AMX for Smart Home?
“HARMAN perfectly complements Samsung in terms of technologies, products and solutions, and joining forces is a natural extension of the automotive strategy we have been pursuing for some time,” said Oh-Hyun Kwon, Vice Chairman and Chief Executive Officer of Samsung Electronics. “As a Tier 1 automotive supplier with deep customer relationships, strong brands, leading technology and a recognized portfolio of best-in-class products, HARMAN immediately establishes a strong foundation for Samsung to grow our automotive platform. Dinesh Paliwal is a proven global leader and, in our extensive discussions, we have developed deep respect for him, his strong senior leadership team and HARMAN’s talented employees. HARMAN’s sustained track record of rapid growth fueled by technology leadership and an unmatched automotive order pipeline reflects its commitment to innovation and customers.”
“The vehicle of tomorrow will be transformed by smart technology and connectivity in the same way that simple feature phones have become sophisticated smart devices over the past decade,” added Young Sohn, President and Chief Strategy Officer of Samsung Electronics. “We see substantial long-term growth opportunities in the auto technology market as demand for Samsung’s specialized electronic components and solutions continues to grow. Working together, we are confident that HARMAN can become a new kind of Tier 1 provider to the OEMs by delivering end-to-end solutions across the connected ecosystem.”
Dinesh Paliwal, HARMAN Chairman, President and CEO, stated, “This compelling all-cash transaction will deliver significant and immediate value to our shareholders and provide new opportunities for our employees as part of a larger, more diversified company. Today’s announcement is a testament to what we have achieved and the value that we have created for shareholders. Samsung is an ideal partner for HARMAN and this transaction will provide tremendous benefits to our automotive customers and consumers around the world. Combining Samsung’s strengths in leading-edge displays, connectivity and processing solutions with HARMAN’s technology leadership and long-standing customer relationships will enable OEMs to provide new offerings for their customers. Partnerships and scale are essential to winning over the long term in automotive as demand for robust connected car and autonomous driving solutions increases at a rapid pace. This transaction will bring HARMAN and Samsung’s complementary strengths together to accelerate innovation in this space. More broadly, this investment underscores the strength of HARMAN’s employees, as well as our success and leadership across our markets. We look forward to working together with Samsung to elevate experiences for consumers worldwide.”
Customer Benefits and Significant Growth Opportunities
Samsung expects the combination to deliver significant growth opportunities and benefits to customers by leveraging Samsung’s and HARMAN’s complementary technologies, resulting in increased market penetration across important end markets.
• Automotive: Combining HARMAN’s leadership in new connected car technologies, including its top positions in infotainment, cyber security, over-the-air updates and telematics, with Samsung’s significant expertise and experience in connectivity technologies, including 5G, UX/UI, display technology and security solutions, will enhance HARMAN’s automotive and connected services businesses to drive greater sales and provide significant benefits as automakers speed the adoption of next-generation connected cars.
• Audio: HARMAN’s leading brands and cutting-edge audio systems include JBL®, Harman Kardon®, Mark Levinson®, AKG®, Lexicon®, Infinity®, and Revel®. The company also licenses Bowers & Wilkins® and Bang & Olufsen® brands for automotive. All of these brands will greatly enhance the competitiveness of Samsung’s mobile, display, virtual reality and wearable products to deliver a fully differentiated audio and visual experience for customers.
• Professional: The combination will also expand the combined company’s business-to-business platform through its ability to deliver integrated, large-scale audio and visual professional solutions at stadiums, concert facilities and other performance centers such as The John F. Kennedy Center for the Performing Arts and STAPLES Center – home of the GRAMMY Awards®.
• Connected Services: Samsung will gain access to HARMAN’s 8,000 software designers and engineers who are unlocking the potential of the IoT market. This collaboration will deliver the next generation of cloud-based consumer and enterprise experiences, as well as end-to-end services for the automotive market through the convergence of design, data and devices.
Operating Structure and Leadership
Upon closing, HARMAN will operate as a standalone Samsung subsidiary, and continue to be led by Dinesh Paliwal and HARMAN’s current management team. Samsung is pursuing a long-term growth strategy in automotive electronics, and plans to retain HARMAN’s work force, headquarters and facilities, as well as all of its consumer and professional audio brands. Samsung believes the combination will increase career development and advancement opportunities for the employees of both companies.
Samsung’s Automotive Electronics Business Team, which was established in December of 2015 to identify opportunities for Samsung in the automotive sector, will work closely with the HARMAN management team to realize the full growth potential of the combination.
Terms of the Transaction
The purchase price represents a premium of 28% based on HARMAN’s closing stock price on November 11, 2016 and a 37% premium to HARMAN’s 30-calendar day volume weighted average price ending November 11, 2016. Samsung expects to use cash on hand to fund the transaction. The agreement has been unanimously approved by the boards of directors of both companies.
The transaction, which is subject to approval by HARMAN shareholders, regulatory approvals and other customary closing conditions, is expected to close in mid-2017.
Evercore is serving as financial advisor to Samsung and Paul Hastings LLP is acting as legal counsel. J.P. Morgan and Lazard are serving as financial advisors to HARMAN and Wachtell, Lipton, Rosen & Katz is acting as legal counsel.