Harley-Davidson & KKR or Berkshire

Barbarians by the Bikes

The snowbanks have melted here in the northeast, Daylight Savings Time has begun, and the black leather crowd is dragging their Harley-Davidson motorcycles from their winter storage. I have yet to see a robin, but it is mid-March and it looks like a typical spring in upstate New York.

Although all appears normal for Harley-Davidson riders, it doesn’t appear that things are even remotely so back in Harley’s corporate headquarters at 3700 W. Juneau Avenue in Milwaukee. The past 12 months have been disastrous for the once-proud icon. Declining numbers and poor stock performance have been the rule.

The sudden outright closing of Buell Motorcycle Company, one of H-D’s smaller divisions, has left sportbike enthusiasts frustrated and angry. Possible plant relocation and layoffs continue to wreak havoc on The Motor Company’s passionate workforce, the same workforce who recently had to swallow the bitter pill of finding that its new company CEO didn’t own a motorcycle.

Ironically, all these issues appear to be minor compared to the latest scuttlebutt about America’s oldest motorcycle manufacturer. A couple of days ago different news outlets printed stories that Harley-Davidson may be subject to a leveraged buyout, and sources pointed to Kohlberg, Kravis & Roberts (KKR) Company’s Private Equity Group as the possible purchaser. Although they have neither confirmed nor denied the rumors, KKR’s own website touts the fact that they have secured $59.3 billion in funding to support their acquisitions over the last three decades.

KKR’s holdings are exceptionally diverse in both location and business scope, so much so that I wouldn’t feel comfortable simply dismissing the rumor as wild speculation – like I did in 2007 when the rumor of a Harley takeover by Honda was making the news. I will, however, go on record to state that I think there might be more than a bit of misguided truth to the rumor this time.

Truth? I think so. It’s no secret that Harley-Davidson is struggling. Demand for the company’s heavyweight cruiser motorcycles began waning in 2003. Management continued to grow production and push dealers to build monstrous new facilities by spouting a rearward-facing rationale that looked at past growth instead of current demand. Harley-Davidson company leaders appeared to pay more attention to the trading value of The Motor Company’s stock price than former CEO Jeff Bluestein’s goal of "making one less motorcycle than customers want."

Today, production of motorcycles is roughly half of what it was less than 5 years ago, dealerships across the country are closing their doors and last year company made news by taking out a pair of $300 million loans (at 15% interest!) to keep operating Harley-Davidson Financial Services, its consumer finance subdivision.

These loans (or more specifically, one of the loans) are what is causing me to use the word "misguided" above. One of the sources of funding is none other than investment guru Warren Buffet, the famously-frugal billionaire that is reportedly one of the three richest men in the world.

Through Berkshire Hathaway, the company Buffet controls, H-D secured a 5-year loan in exchange for $300 million in senior unsecured notes issued by the Milwaukee icon. (The other $300 million loan came from Davis Selected Advisers, LP.) Instead of KKR, I think Berkshire Hathaway might be the true suitor.

Berkshire Hathaway is well-known for the staggering stock price of its class A stock (I just checked and found it at $123,458 per single share) and the fact that Warren Buffet, its CEO, has an annual salary of only $100,000. The company is exceptionally successful and its growth is often attributed to the Buffet’s broad understanding of business.

Although Berkshire Hathaway is known for its investment in companies like Coca-Cola, Wells Fargo, and American Express, this has little to do with the Harley situation. A lesser known (but far more important) side of Berkshire Hathaway is the "private" side of the company that owns many of America’s best known brands. GEICO, Dairy Queen, Benjamin Moore, and Fruit of the Loom are just some of the almost 40 companies that are wholly owned by Berkshire Hathaway. Last year, Berkshire Hathaway began acquisitions of the Burlington Northern Santa Fe Corporation (yes, the entire railroad!) and it completed the process last month.

I may be wrong, but my guess is that Buffet and his staff began looking at the financials of Harley-Davidson as part of their research into the viability of making the $300 million loan. Once the motorcycle manufacturer’s financials were on the Nebraska-based firm’s radar, more studying took place. While Harley-Davidson cut its costs and secured labor concessions, capital markets loosened up a bit and suddenly the company looks like an appealing investment.

I strongly support this acquisition. I believe that the once-strong Harley-Davidson would further diversify Berkshire Hathaway’s amazing portfolio, strengthening both organizations. Having Harley-Davidson leaders manage the motorcycle business instead of their stock price would provide a much-needed focus on the 4th floor of Juneau Avenue, hopefully pushing Harley toward shorter new model development times and updated traditional styling that remains true to The Motor Company’s roots but gives riders a fresh reason to go into dealers’ showrooms (look no further than the new Ford Mustang, Chevy Camaro and Dodge Challenger).

Taking the company private would remove the enormous distraction of dealing with quarterly public reports, financial media presentations that are more scrutinized than Harley’s new model presentations, and future shareholder lawsuits brought by lawyers with nothing better to do. The only downside? That would be for Harley’s CEO Keith Wandell, who reportedly was paid $6.4 million dollars for 8 months of work in 2009. Could 2010 be the year of the $6.3 million pay cut so he isn’t paid more than his boss?

Todd B Wilson is a former Harley-Davidson Motor Company employee and a co-host of the nationally-syndicated Motorcycle Radio Network. The show airs weekly on radio stations and digital cable and satellite TV music channels across the USA; Podcasts of the show are available on iTunes, Zune and UltimateMotorCycling.com and MotorcycleRadioNetwork.com.