Technological change continues to drive automotive M&A

Despite a slight quarter-on-quarter uptick in Q3, automotive M&A has softened overall in 2019 as the industry faces broad structural changes

The secular move towards tech-enabled vehicles combined with the rising tide of environmental legislation is forcing mergers, acquisitions, joint ventures and alliances as manufacturers and suppliers prepare themselves for a more sustainable, more automated future.

But even though the industry's need to remodel itself should be a strong driver of M&A, the first three quarters of 2019 saw a 31% drop year on year  in automotive deal value, to US$28.7 billion. Volume also dropped 20% to 226 deals during that period. This comes against a backdrop of depressed M&A across sectors, associated with cooling global economic growth and ongoing trade frictions.

Germany’s Center for Automotive Research estimates that the global car industry will lose sales over the next five years worth nearly US$770 billion as a result of US tariffs, with China's auto industry suffering the most losses, followed by Germany, a close automotive trading partner with Asia's largest economy. The forecast indicates that global car and SUV sales will fall from a peak of 84.4 million in 2017 down to 77.3 million in 2020 before slowly recovering to 87.9 million in 2025.

Despite the decline in automotive M&A so far in 2019, the year could end on a high note, with a mega deal announcement. Italy-based Fiat Chrysler Automobiles (FCA) and France’s PSA, the maker of Peugeot, announced their intention to merge in October; however, as the parties have yet to sign binding terms, the deal has not yet been logged by Mergermarket. FCA Chairman John Elkann has said he expects both companies to sign before the end of the year, in a deal that is likely to be worth more than US$20 billion.

With a market capitalization of around US$20 billion, FCA is one-tenth the size of the world’s largest automotive OEM, Toyota. The combined FCA/PSA entity would have revenues of revenues of more than US$170 billion, putting it ahead of Ford Motor and making it the world’s fourth-largest automotive OEM by revenue.

Modest acceleration in Q3

Despite of generally cooler deal activity in 2019, Q3 did see a moderate rise in M&A value compared to the previous quarter. Total auto M&A rose  9% quarter on quarter to US$8.4 billion, even as volume dropped 18% to 68 deals.

In line with a now-established sectoral trend, there was a clear tech angle to the quarter's largest deal, in which Hyundai invested US$2 billion in a 50-50 JV with Aptiv, an automotive technology company. In the second-biggest deal of Q3, Toyota expanded its strategic partnership with Suzuki, the former making a US$903 million investment in the latter for a 4.9% stake; the sharing of hybrid technology is part of that alliance.

Other alliances for developing driverless technology have been formed by a number of manufacturers who are preparing themselves for the coming era of autonomous vehicles. They are finding that the simplest way to do this is to share expertise, whether through acquisitions or through strategic partnerships.

It is not only original equipment manufacturers (OEMs) that are making highly strategic acquisition plays motivated by technology. As the auto industry as a whole moves towards CASE (connected, autonomous, shared, and electrified) trends, suppliers are adjusting their portfolios and expertise. This is illustrated by a number of tier-one auto suppliers' move into Israel, whose core prowess in technology and rich start-up ecosystem have naturally seen the country excel in autotech.

Margin squeeze 

It is not just auto sales that are under pressure, but margins too. Ford, for example, estimated that tariffs on steel and aluminum cost the company US$1 billion in 2018. Reduced earnings and sustained debt are not traditionally conducive to M&A, but these may in fact spur partnerships that can help manufacturers and suppliers stretch their R&D budgets by sharing expertise as well as pooling the investment costs associated with developing cutting-edge technologies. 

Nevertheless, the move to build smart, sustainable, autonomous cars will continue to motivate major carmakers to strike alliances for the foreseeable future. The same pressures also are driving further consolidation in the auto supplier segment as well as divestments, as OEMs and suppliers optimize their asset portfolios in the face of a changing industry.

This is an area where private equity funds could come into play. The largest US domestic deal of Q3, for example, was a US$853 million transaction which saw metals and components supplier Tower International sold to Autokiniton, an entity created last year by PE firm KPS Capital to build a new automotive supplier through acquisitions.

Those watching M&A in the auto space are likely to see the most proactive firms making both defensive and offensive moves by investing in new technologies, striking alliances with competitors, and divesting the assets they no longer deem core to their business.

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