Samsung Electronics Co. is spending $8 billion to buy its way into a burgeoning market for automotive technology alongside Apple Inc. (Nasdaq: AAPL) and Google as the smartphone business wanes.
The company is making its largest-ever overseas acquisition with an offer for Harman International Industries Inc. (NYSE: HAR), angling to become the go-to supplier of everything from in-car entertainment to connected-auto services. It comes days after Samsung Group heir-apparent Jay Y. Lee formally ascended to the board of the electronics firm, a move expected to shore up his influence over the family-run conglomerate’s prized asset.
An increase in car sales all over the world has fueled M&A in companies in the auto business, including parts and services. Crestview Partners has agreed to buy Accuride Corp. (NYSE: ACW); Grakon acquired Hamsar; and the Watermill Group purchased Experi-Metal Inc.
The Harman acquisition will lift Samsung into the top ranks of auto technology suppliers and give it existing relationships with BMW AG, Volkswagen AG and General Motors Co. (NYSE: GM). While Harman became a legendary name in high-end audio equipment, it’s pushed deeper into automotive supplies and now gets 65 percent of sales from the sector.
“This is the first deal cut after Jay Y. joined the board and shows his management style is different from his father. He is an aggressive deal maker,” said Park Kang-ho, an analyst with Daishin Securities Co. “In the longer term, Samsung is thinking that life after smartphones is electric vehicles.”
The Korean company joins a growing list of global technology companies moving into automobiles. The companies see cars as an industry that hasn’t yet been remade by software and online technologies.
But outside of Elon Musk’s Tesla Motors Inc., the efforts haven’t yet reached customers. Google has for years been working on self-driving software but its systems haven’t yet reached the market. Apple went on a hiring spree to add staff to build its own car before recently re-calibrating the initiative to focus more on software, leading to job cuts. Uber Technologies Inc. joined the fray over the past year, hiring engineers and making acquisitions to build its own autonomous car technology.
Samsung itself has bought a stake in Chinese electric-car maker BYD Co. and at one point considered an offer for sections of Fiat Chrysler Automobiles NV’s parts unit, a deal said to have broken down just weeks ago. With the Harman purchase, it’s taking a different approach that’s more in keeping with its history has a component maker. Rather than designing a car or building a self-driving system, Harman’s technology focuses on the growing number of services available as automobiles get connected to the internet -- navigation, multimedia entertainment, security systems and analytics tools.
This transformation of the auto into a full-service mobile device adds up to a potential goldmine. Revenue from the data streams and connectivity components could become a 180 billion-euro ($200 billion) market by 2020, McKinsey & Co. estimates.
“Samsung may have figured that it can’t become the biggest player in the car component business by itself, so it needs a big brand to get into the market,” said Greg Roh, an analyst at HMC Investment Securities Co.
For Samsung, establishing a foothold in automotive technology offers the company a chance to shed its reliance on a smartphone market undergoing its worst downturn on record. The company is the world’s biggest supplier of displays and memory for mobile devices -- replicating that dominance in autos will inject new life into the business. It’s now struggling to put the embarrassing death of the fire-prone Note 7 behind it, while searching for its next leg of growth.
Samsung said Harman is the market leader in connected car solutions, with more than 30 million vehicles equipped with its connected car and audio systems and telematics. Telematic devices allow in-vehicle access to specific services, including car parks and anti-theft security. The Stamford, Connecticut-based company has an order backlog for the auto market of $24 billion as of June 30.
“Harman has a scale and premium in the car-infotainment and audio businesses, so it would definitely help Samsung move faster. But it alone is not enough for Samsung to become the leader in this space,” said Roh.
The audio company can trace its roots back to the 1950s, when Sidney Harman teamed with Bernard Kardon to make high-fidelity machines. The company would later acquire brands including JBL and Infinity, among other audio equipment makers, and become a leader in high-end car stereo systems. It also owns the Bang & Olufsen brand for cars after acquiring the business last year.
Evercore Partners Inc. (NYSE: EVR) is serving as financial adviser to Samsung, while JPMorgan Chase & Co. (NYSE: JPM) and Lazard (NYSE: LAZ) are advising Harman, according to the statement.
“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,” Vice Chairman Kwon Oh-hyun said in the statement. “Harman immediately establishes a strong foundation for Samsung to grow our automotive platform."
Additional reporting by Mergers & Acquisitions' Demitri Diakantonis