The case describes how the founder built his firm into one of the world’s most exceptional manufacturing firms. Knowles Electronics had a nearly 100% market share of the market for hearing aid microphones and speakers (transducers). The firm also sold products off-the-shelf to NASA in the 1960s because its product quality, and all of its quality control systems, exceeded the requirements for NASA’s lunar program.
This case then describes a private equity firm’s acquisition of Knowles Electronics, and the subsequent sale of Knowles to a publicly-traded corporation. The firm issued a new class of stock to the private equity firm and to management, issued mandatorily callable preferred stock to the private equity firm, and raised debt financing from several large banks. Knowles then used that cash to retire old equity securities from the founder’s heirs.
That information is only available for private equity acquisitions if the acquired firm issues publicly-available financial statements. That is rarely the case but in this instance, the private equity firm expected to take Knowles Electronic public in a year at a very large gain, so it agreed to make the debt publicly tradable. When Knowles’ revenues declined, the private equity firm was unable to conduct an IPO, but did need to file financial statements with the SEC because the debt was publicly tradable.
The teaching note includes Knowles Electronics (B), which covers the firm’s subsequent sale to a publicly-traded company, and how that company accounted for the Knowles acquisition.