Electrification will be driving mergers and acquisitions in the automotive industry over the coming years. Here’s why:
Dealmakers at Stout, an investment bank based in Chicago, discussed the results of its recent industry survey. While it used the standard acronym CASE – connected, autonomous, shared, and electric – in the survey, the bankers make it clear that electrification is the backbone behind the trends.
“It’s still the wild west out there,” says Mike Benson, a Stout managing director based in Detroit. “Suppliers are tied to ICE [internal combustion engines], but they are working to bridge the gap.”
David Hale, a former private equity hand also based in Detroit for Stout, agrees. “Tier 1 suppliers are tweaking their portfolios,” he says. “Ninety-percent of the supplier base is seeking EV friendly solutions.”
This is not taking place in a vacuum, as the various trends in CASE reinforce each other, the Stout experts say. Shared mobility, robotaxis, and other trends are combining with climate and environmental considerations to push the industry forward.
In their report, the Stout team reported a downtick in activity in the first half of this year after 2021 saw a huge increase from pent-up demand in the wake of the Covid-19 pandemic. But they also measured a 14 percent increase in deals over the prior year in the last 12 months (through June 30), as the bulge in fourth-quarter 2021 deals yielded a total of 850 transactions in the period. Stout expects the momentum to last into 2023, when the industry is projected to reach pre-pandemic volumes as long-term demand remains intact.
“A lot of activity becomes more affordable as valuations decline,” says Hale. “Private equity will be able to put in operational control with more visibility on performance.”
The perfect storm of negative events in Europe – from natural disasters to the Russian invasion of Ukraine – has stymied activity there, at least for the time being.
“The M&A market there is completely frozen,” says Benson. The chilly atmosphere is driving European firms to seek acquisitions in North America and Southeast Asia as an alternative to greenfields development of capacity, he says.
The shortage of silicon chips, which Stout expects to play a meaningful role in 2023, is slowing activity in the industry, while the general economic situation is creating near-term uncertainty.
“There’s the ‘look stupid’ factor,” says Benson. “Once there is a recovery in chips and the cars are in the lot, will the consumers be there?”
But there is also momentum in batteries and EV infrastructure as OEMs choose between vertical integration a la Tesla, or partnership, or acquisition. The automotive industry is undergoing a revolution as it keeps pace with a transition in mobility – a real change from the mature industry of just a few years ago.
Says Benson: “We haven’t seen this kind of activity in automotive for many years.”