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Samsung's Harman deal may allay investor criticism

Dinesh Paliwal, CEO of Harman International Industries, announces the opening of the company's new North American automotive headquarters in Novi, Michigan, in January. Harman is expected to contribute to earnings at Samsung Electronics as a key subsidiary.

SEOUL -- Samsung Electronics' acquisition of U.S. automotive technology company Harman International Industries comes at a time when the South Korean manufacturer is being criticized by investors for not using its vast cash holdings effectively. 

Samsung said Monday it will purchase all outstanding Harman shares for $112 each, representing a premium of nearly 30% to the Connecticut-based company's closing price last week. The total price tag will come to $8 billion, making it the biggest acquisition for a South Korean company.

Harman's key strengths include car navigation systems and other automotive electronics, which account for more than 60% of its sales. In the 12 months through June, Harman logged an operating profit of almost $700 million, with sales of $6.9 billion.

Technological advances in the so-called internet of things, which connects physical devices, vehicles, buildings and other items via the internet, have prompted competition among makers of cars and auto parts to establish standards for the new technology. Samsung and Harman expect the market for automotive electronics to grow to $186.4 billion in 2025 from $54.2 billion in 2015, thanks to rising demand for technologies such as support devices for self-driving systems.

Samsung announced a plan last year to enter the automotive industry in a bid to create a new core earnings source. The business offers opportunities to utilize information technology that the company has accumulated through production of smartphones and semiconductors.

The acquisition has been generally welcomed by the market. Harman will help Samsung become highly competitive in the automotive electronics business, an SK Securities analyst said. Next-generation motor vehicles will be equipped with sensors to monitor driving conditions, inverters to efficiently circulate electricity and communications equipment, the analyst said.

Hanwha Investment & Securities described the deal as "attractive" because it will make Samsung a primary supplier for major carmakers. Harman supplies parts directly to automakers such as Toyota Motor and Volkswagen.

Primary suppliers, which deal directly with automakers, are in a better position to gain information on industry trends and advanced technologies.

Compared with leading suppliers of the Toyota group, Harman lags behind Denso and Toyota Boshoku in business scale but is close to Toyoda Gosei. Harman is thus expected to contribute to Samsung's earnings as a major subsidiary.

Some investors have criticized Samsung for failing to make efficient use of its assets, as the company's cash holdings have grown to around $54 billion. Elliott Management, a U.S. hedge fund management company, urged Samsung last month to pay a special dividend of 30 trillion won ($25 billion) to shareholders, in addition to transforming itself into a holding company structure.

The largest previous acquisition by a South Korean company was Doosan Infracore's 2007 purchase of a U.S. construction machinery unit for $4.9 billion.

Samsung is expected to announce a new shareholder policy as early as this month that may include additional spending plans to support its growth strategy.

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