Harman continues fall; HCC pulls deal; Arris, C-COR to merge; GM slips on strike

By Evan Weinberger

New York, Sept. 24 - Harman International Industries Inc. continued its tumble Monday following the collapse of a long-discussed buyout by two private equity firms on Friday.

The capital markets may not have improved as much as market watchers had hoped given the hefty Federal Reserve interest rate cut of last week. As evidence, HCC Insurance Holdings Inc. pulled back some paper that it had announced was coming to market. The company cited an unfavorable credit environment as the main reason.

Buyout fever may have slowed down, as only one new deal was announced Monday. Arris Group Inc. announced a $730 million merger with C-COR Inc. The combined firms will be the largest pure play equipment and products company for the cable industry. The deal also continues Arris' recent growth, including expansion of research and development in China and South America. The two companies had a combined $1.2 billion in profits in the last 12 months.

In other economic news, the United Auto Workers walked out of General Motors Corp. factories at 11 a.m. ET Monday after talks between the two parties ran aground on the jagged rocks of job security, not retiree health benefits as had been speculated. GM stock was down less than a percent Monday despite the work stoppage.

Markets were down across the board Monday, with the Dow Jones Industrial Average dipping 61.13 points, or 0.44%, to close at 13,759.06. The Nasdaq gave back 3.27 points, or 0.12%, for a 2,667.95 close. And the Standard & Poor's 500 closed at 1,517.73, a drip of 8.02 points, or 0.53%.

Harman losses tied to backer pullout

Washington, D.C.-based electronics and audio equipment company Harman was hammered Friday after reports surfaced that Kohlberg Kravis & Roberts Co. LP and GS Capital Partners VI Fund, LP were backing out of the $120-per-share purchase agreement. Confirmation of those reports later Friday didn't help matters.

Neither did Harman's announcement Monday that it was expecting third-quarter earnings to come in at 50 cents per share, less than half of analysts' expected $1.02 per share. A statement from Harman said that increased research and development costs were to blame for the poor earnings.

After losing almost 25% of their value Friday, shares in Harman (NYSE: HAR) still couldn't find the floor Monday, losing $4.69, or 5.52%, for an $80.31 close.

A trader following the situation said the further drop had nothing to do with the poor earnings. The buyout deal's sponsors cited "material adverse conditions" as their reasons for backing out of the deal. Monday's announcement didn't qualify as a "MAC," the trader said.

Harman didn't lose contracts with Mercedes, BMW, Audi or any other auto manufacturer, he pointed out. "It's just a continuation of Friday. It's not like they lost a contract. It's not a huge event," he said of the earnings guidance.

Credit conditions not favorable for HCC

HCC Insurance Holdings, a Houston-based insurance company, announced Friday that it was pulling back a $300 million offering of senior notes Friday afternoon, citing poor capital market conditions.

"The withdrawal of this offering will have no effect on the previously announced redemption of our outstanding 2% notes nor on our ongoing operations as our cash-flow from operations and bank line of credit are sufficient to satisfy our needs," HCC chief executive officer Frank Bramanti said in a statement late Friday afternoon.

Investors may have differed with Bramanti's characterization of the decision to pull back the deal, as HCC stock (NYSE: HCC) lost 56 cents, or 1.96%, on Monday for a close of an even $28. That followed a 21 cent, or 0.73%, drop on Friday.

Arris, C-COR deal to provide bigger bandwidth

The increased size of data packets transferred for high-definition television, high-speed internet and internet telephone services will require higher bandwidth. The heads of and investors in the newly combined Arris Group and C-COR hope that their firm will be the ones providing it.

Monday's announcement of the merger of Suwanee, Ga.-based Arris Group and State College, Pa.-based C-COR for $730 million creates the largest provider of pure play equipment and products for the cable industry, with a combined $1.2 billion earnings over the course of the last year.

The two companies have a history of working together, according to a joint statement announcing the merger. "The complementary nature of our portfolios has led us to interact often in supporting our common customers," said Arris Group chairman and chief executive officer Bob Stanzione in the statement. "The combination of our two businesses will create the leading pure play solutions provider to the global cable industry offering a full suite of IP telephony, high speed data, video infrastructure and video management solutions."

Holders of C-COR shares will receive $13.75 per share of C-COR, representing an approximately 19% premium to C-COR common stock's 30-day trading average and a 39% premium C-COR's closing price on Sept. 21. Holders can also receive 0.9642 share of Arris stock per share of C-COR stock. Holders will receive cash, Arris stock or a combination of the two.

"We anticipate that the combined company should enjoy the advantages of economies of scale," said Arris Group chief financial officer David Potts. "With respect to the capital structure, very importantly, the transaction was structured to ensure that the combined company will have a robust balance sheet to support operations and provide the flexibility to pursue other strategic initiatives."

The deal, which is expected to close in January 2008, represents further growth for Arris. The company opened research and development operations in China and Argentina and failed on a bid to buy Southampton, Ga.-based Tandberg Television earlier this year.

Arris Group stock (Nasdaq: ARRS) retreated Monday, losing $2.28, or 15.99%, to close at $11.98. C-COR stock (Nasdaq: CCBL) moved in the other direction, gaining $2.14, or 21.66%, for a close of $12.02.

GM stock slips on strike

While it would be reasonable to expect Detroit-based GM to tumble because of a production halt in American factories, that didn't happen. There was slippage in the auto giant's stock, although it took some time for the slip to occur.

The 73,000 UAW workers who build cars and trucks in around 80 GM factories in the United States walked off the job at 11 a.m. ET after the union and GM couldn't reach an agreement on job protection prior to the union's 11 a.m. deadline. Union representatives said that the talks did not stall on health benefits for retirees, as had been widely speculated.

GM's bottom line has been battered by health insurance and pension claims of retired and current workers. And it has been losing market share to Toyota and other car manufacturers in recent years.

GM stock (NYSE: GM) lost 20 cents, or 0.57%, to close at $34.74 on Monday.

GM says it has around 950,000 cars and trucks in stock and ready to roll out to dealerships, but the Teamsters Union has already said that it won't cross the UAW picket line.

Once a deal is cut between the UAW and GM, it will be taken as a baseline agreement to Ford Motor Co. and Chrysler LLC. How the new deal will affect their earnings is unclear. "It depends upon the deal they cut," an analyst said.

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