Samsung's (SSNLF) $8 billion purchase of Harman International (HAR) illustrates the value of the portfolio of smart-car technology that the target has amassed, in large part through recent acquisitions.
While the company is known among consumers for audio brands such as Harman/Kardon, Bang & Olufsen, JBL and Infinity, Chairman and CEO Dinesh Paliwal has boosted Harman's position in the market for connected cars and other cloud and mobile services. The company has acquired tech to improve automotive cyber-security, safety, data transfers and other processes.
"They really got their start as a premium audio system supplier then moved into building and supplying the infotainment head units [or central user interfaces] and recognized early on the importance of software and services in the growing connected vehicle market," said Gartner analyst Jim Hines. "Given their niche in the infotainment space and the importance of the in-vehicle infotainment system as the central gateway for connected vehicle services, Harman has executed on a solid vision."
Samsung Chief Technology officer Young Sohn told investors Monday that the automotive technology market will hit $100 billion in annual sales by 2025, and said cars are undergoing a shift akin to the evolution of feature phones to smart phones.
The Korean conglomerate created a team to study car tech last December and decided it needed to move fast. "Organic growth will not get us where we want to go fast enough," Sohn said. "By acquiring Harman, which is a market leader, we'll immediately achieve critical mass."
Connected car technology such as infotainment systems, telematics, safety and security account for 44% of Harman's $7 billion top line. Clients include BMW AG, Daimler AG, Ford (F) , General Motors (GM) , Subaru, Toyota Motor Corp., Lexus and others.
Another 9% comes from its connected services unit that combines data analytics with mobile and cloud services for auto, healthcare and other sectors.
Audio, including sound systems for cars, generates 32% of sales. The division that provides audio, video and other technology to corporations makes up the remainder.
Paliwal came to Harman in 2007 from Swiss technology and engineering group ABB Group, after founder Dr. Sidney Harman arranged an $8 billion sale to KKR (KKR) and the private equity arm of Goldman, Sachs (GS) . The transaction fell apart during the economic collapse, however, but Paliwal stayed on to run the company.
Paliwal has used acquisitions to speed Harman's makeover. The company bought Aha Mobile Inc. in 2010 to enhance its ability to stream music and other content to cars, and acquired driver-assistance technology developer iOnRoad Technologies Ltd. for an undisclosed sum in 2013.
In January 2015, Harman made a pair of acquisitions that Paliwal described as a "a defining moment in our company's transformation story," in an investor presentation. The company paid $780 million for Symphony Teleca Corp., which develops software to enable cars and other devices to communicate via wireless and cloud networks. Symphony Teleca was the only software company in Google Open Automotive Alliance, Paliwal noted during the call, and had enough scale to move the needle on Harman's smart-car business.
It also paid $170 million for Red Bend Software Inc., which develops technology allowing wireless updates to software in cars or other smart-products.
Earlier this year, Harman purchased automotive cyber-security company TowerSec. As more cars gain wireless connections, payment capabilities and other functions, securing vehicles becomes a higher priority. Samsung projects that within a decade 90% of cars will be connected to the internet.
Paliwal told investors that talks leading to the Samsung deal started over the summer. "This was a very fast process," he said.