Why Samsung Is Buying Harman

Samsung Electronics (OTC:SSNLF) has announced a deal to buy U.S. car infotainment and audio company Harman in an all-cash transaction, valued at about $8 billion. ^[1] The deal, which is expected to close in mid-2017, could make Samsung a mainstay in the automotive electronics market, as it looks to diversify revenues at a time when its bread-and-butter smartphone unit has come under pressure following the Galaxy Note 7 fiasco. Below we provide a brief overview of what Samsung stands to gain from the acquisition.

Trefis has a $1,340 price estimate for Samsung Electronics, which represents a slight premium over the current market price.

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Technology Companies Are Betting Big On The Auto Market 

Software and electronics are playing an increasing role in the automobile industry, with automotive electronics estimated to account for upwards of 30% of a modern vehicle’s cost. The market for automotive electronics is projected to grow to over $100 billion by 2025, according to Samsung. Tech giants seem to be approaching the market in different ways. While Silicon Valley firms such as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) appear to be betting big on building connected and self-driving car platforms that they could potentially license out to automotive firms, Samsung’s initial focus is more hardware-oriented. This could prove to be a less risky, yet lucrative bet in the near term.

What Samsung Gets With The Harman Deal

While the Harman name is commonly associated with premium audio equipment, roughly 65% of the firm’s $7 billion in revenues (for the 12 months ending September 2016) actually came from supplying components and developing software for auto manufacturers. Harman’s automotive-focused products include navigation systems, infotainment, telematics and driver-assistance technologies.

By acquiring Harman, Samsung should be able to gain solid footing in the automotive component business, as Harman is a Tier 1 supplier, with deep relationships with a wide range of customers that include established names such as General Motors, as well as high-growth companies such as Tesla. As of June 30, Harman had an order backlog of roughly $24 billion from its automotive partners. Moreover, Samsung’s component businesses also stand to gain from the transaction, as connected cars are likely to increase demand for displays, memory and microprocessors. The deal could also help to bolster Samsung’s software engineering capabilities to some extent, as Harman has a team of roughly 8,000 software engineers who are working on cloud-based consumer and enterprise experiences, as well as end-to-end services for the automotive market.

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1. Samsung Press Release [↩]