Steinway Musical Instruments Inc. agreed to be acquired by Paulson & Co., the hedge fund owned by billionaire John Paulson, in a deal valuing the 160-year-old piano maker at about $512 million.

The offer for $40 a share tops that of private-equity firm Kohlberg & Co., which had bid $35 a share last month for Waltham, Mass.-based Steinway. Kohlberg withdrew its bid yesterday after disclosing a rival bid of $38 a share said to be from Paulson. Steinway’s board recommended that all shareholders tender their shares to the new offer, according to a statement today.

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