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Automotive: US Deals 2023 outlook
Overheated automotive M&A cools down in 2022
Global automotive M&A continued its pullback from a hectic 2021 deal market with a total deal value of $57 billion for 2022, down 62% from 2021. Deal volumes also fell — down 18% to about 900 deals in 2022 — but consistent with pre-pandemic deal activity levels. We expect the retreat from the first half of 2022 to continue in the second half of 2022 given the macroeconomic challenges facing the industry this year. Yet, there is confidence that deal volumes will remain at historical averages, as the financial health of the industry and transition to electric powertrains and computer-aided software engineering (CASE) assets continue to spur investment in the face of recessionary fears.
Dealmakers have demonstrated more discipline in their capital deployment in 2022, and this will likely continue into 2023. Due to inflation and higher interest rates, there is now less margin of error with strategic decisions, and dealmakers should act accordingly. While we expect a more disciplined market, deal volumes will likely remain stable as M&A continues to serve as one of the swiftest ways for companies to transform their capabilities for an electric future, increase supply chain resiliency and consolidate their scale and go-to-market approach.
Automotive deals outlook
Ongoing uncertainty surrounding the capital markets will likely provide a cautious start to 2023 deal activity. Despite challenges, there should be opportunities for both strategic and financial buyers to capitalize on — and create value for — shareholders.
To facilitate this, dealmakers will need to review their product portfolios. Assessing which businesses are core and which are candidates for divestitures can generate capital to redeploy into other businesses — for example, investing in a transaction for transformation of a core function through new technology or environmental, social and governance (ESG) capabilities. Companies that make timely and objective divestiture decisions and strategically manage their portfolios will likely earn advantages in this dynamic business environment.
Some companies can be reluctant divestors, as executives can choose to fix a strategic business problem with tactical solutions rather than quickly divesting and reinvesting. An upcoming PwC study on the value in divestitures found that timeliness in assessing portfolios and divestiture decision-making are crucial to value creation.
This will be a challenging mindset shift for executives, but a vital one if they are to capitalize on deal opportunities in 2023 as opportunistic and distressed M&A may provide unique investment opportunities. We expect a resurgence of supplier and retail consolidation to support deal activity in 2023. Headline deals will likely, however, continue to focus on transformational CASE assets, which remain highly competitive as the availability of dry power will likely drive continued heightened financial buyer interest in these highly sought-after assets.
“Executives should take a hard look at their business. While deal fundamentals remain strong, executives will find growth alone is not sufficient in this challenging and rapidly changing environment. Acting quickly to divest non-core assets and reinvest will drive higher returns, even in an environment with higher capital cost and inflation.”
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