To His Collection of Steinways, Hedge Fund Titan Adds Their Maker

Updated, 9:16 p.m. | John A. Paulson, the hedge fund billionaire, already owns three Steinway & Sons pianos: the medium model M grand, the larger model O and the nearly seven-foot-long model B, together worth tens of thousands of dollars.

But Mr. Paulson, in investing parlance, was looking to increase his exposure. On Wednesday, his firm, Paulson & Company, agreed to buy the company that makes the pianos, Steinway Musical Instruments, for $512 million.

The move raised eyebrows both in the world of music and on Wall Street. Mr. Paulson made billions in 2007 largely with a bet against the housing market. His firm specializes in mortgages, gold and other financial assets.

And while Paulson & Company owns stakes in companies, it has never before bought one outright. But Mr. Paulson said that the calculation was rather simple — he loves the pianos.

“I’ve always been enamored with the product,” Mr. Paulson said in an interview on Wednesday. “You have Mercedes in cars, and top brands in every other area. But no one has such a high share of the high end.”

But while he got what he wanted within days of making his first offer, a bidding contest for Steinway broke out behind the scenes. In July, the private equity firm Kohlberg & Company said it had reached an agreement with Steinway to buy it for $35 a share. But Kohlberg bowed out of the running on Tuesday in the face of a bid from Paulson of $38 a share.

That same day, though, an additional challenger emerged — Samick Musical Instruments of South Korea, which is Steinway’s biggest shareholder. Using the code name “Edelweiss,” presumably in a reference to “The Sound of Music,” Samick offered $39 a share.

But on Wednesday morning, Steinway, whose stock ticker symbol is LVB, for Ludwig van Beethoven, pronounced Mr. Paulson the winner after his firm had increased its bid to $40 a share.

“We’re fortunate in this case that John is a personal fan of our product,” Michael T. Sweeney, Steinway’s chairman and chief executive, said on Wednesday. “His love for the instrument gives him the insight as to how we can build the business.”

While the deal is done, there is still a chance that a higher bid may emerge, and Steinway is allowed to consider unsolicited offers.

In the world of music, Steinway is not just another company. Founded in 1853 by a German immigrant in Manhattan, Henry Engelhard Steinway, and his three sons, Steinway pianos became an icon in concert halls and living rooms. Steinway spends almost a year building each grand piano, and the result, its devotees say, is an unmatched quality of sound. The announcement in March that the company was selling its famous showroom on West 57th Street in Manhattan was greeted in many quarters with sorrow.

Still, the financial maneuvering left some of Steinway’s devotees full of concern as they recalled difficult times in the past. With piano factories in Astoria, Queens, and Hamburg, Germany, the company was family-owned until 1972, when it was sold to the CBS Corporation, an owner that many aficionados believed sacrificed quality in pursuit of higher profits.

CBS cut costs, changed the management and pushed Steinway to produce more pianos, said Frank M. Mazurco, who started as a sales representative in Cincinnati and rose to become executive vice president of Steinway before he retired in 2007.

“We had to do a lot of damage control,” Mr. Mazurco said. “It wasn’t a good fit.”

Leon Botstein, the musical director of the American Symphony Orchestra in New York and the president of Bard College, said the CBS period should be a “warning” to Mr. Paulson. Steinway was eventually sold in 1985 to investors in Boston, and, after changing hands again, it went public in 1996.

“Let’s hope it’s a hedge fund with some idealism, with interest in something more than the everlasting buck,” Mr. Botstein said.

Mr. Paulson vowed to keep the business largely as it is. He indicated that he had no plans to close, relocate or change any of Steinway’s manufacturing operations.

Instead, Mr. Paulson said his strategy centers on expanding Steinway’s reach around the world. He is also betting that the improving economy and strengthening housing market will help the sales of Steinway pianos, a luxury item that proved to be out of reach in recent years, even for its usual wealthier clientele.

With the company’s sales flagging in the aftermath of the recession, a team of executives offered in 2011 to buy everything but the piano business. But after reviewing its options — a period in which it fielded interest from two private equity firms — the company ultimately announced last December that it was not for sale.

Then, in July, Kohlberg made its offer to buy the entire company. That is when Mr. Paulson began to pursue Steinway in earnest. In the last several weeks, he read a book on the company to help bring himself up to speed.

One analyst, Arnold Ursaner of CJS Securities, said it was not surprising that Mr. Paulson — who donated $100 million to the Central Park Conservancy last year — was making a play for Steinway.

“You have a global luxury brand,” Mr. Ursaner said. “It’s no different from a painting or a magnificent Fifth Avenue apartment.”

Today, Steinway has expanded beyond pianos to sell horns, clarinets, saxophones and drums. It so happens that that aspect of the business is right up Mr. Paulson’s alley.

Though Mr. Paulson is not a pianist, he played the drums, clarinet and saxophone when he was a teenager and into his 20s, eventually setting them aside when he could not keep up the necessary commitment.

To Mr. Botstein, Mr. Paulson’s musical background is a positive sign.

“He bought something with a huge moral responsibility,” Mr. Botstein said. “It would be a tragedy if this were to be abused or exploited. It needs to be treated with love and with care.”