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Automotive: Deals 2022 midyear outlook

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Overheated automotive M&A cools down to start 2022

Global automotive M&A cooled down from an active 2021 market with a total deal value of $28 billion for the 2022 YTD period down 62% over YTD 2021. Deal volumes were down 55% to 245 deals in YTD 2022 with an average disclosed deal size of approximately $113 million — down 16%. The automotive industry faced a number of macroeconomic and global tensions that ushered in new challenges to navigate — weighing on results and forcing more disciplined capital deployment.

Increased geopolitical tensions, inflation, increased interest rates, record oil prices and the war in Ukraine further exacerbating supply chain challenges resulted in a pull-back of M&A activity. In these uncertain times, executives paused their acquisitions to focus on shoring up their businesses and balance sheets to weather what could be a volatile second half of 2022 and start to 2023.

Nonetheless, underlying fundamentals favor a recovery of M&A activity spurred by continued investments in new-energy vehicles (NEV) and computer-aided software engineering (CASE) technologies. Traditional themes of supplier and retail consolidation will drive M&A activity into 2023 as more disciplined approaches are pursued to navigate macroeconomic and geopolitical uncertainty. 

Automotive deals outlook

M&A recovered in 2021 and exceeded expectations as investments in new technology accelerated, driven by the availability of capital and a competitive market for assets. While deal activity softened in the first half of 2022 as a number of macroeconomic and global tensions played out, we expect deal activity in the second half of 2022 to be driven by investments in CASE technologies and NEV as automotive suppliers navigate a number of headwinds.

Opportunist and distressed M&A could play a meaningful role in automotive M&A in the second half of 2022 and into 2023 as recessionary warnings flash. Higher interest rates, persistent supply chain constraints and tight inventories add stress to many companies that are only just recovering from the COVID-19 pandemic, and secondary shocks could make them acquisition targets. An increase of supplier and retailer consolidation is expected as the industry chases scale and navigates turbulent times. Availability of capital could fuel financial buyer activity as they seek opportunities to enter a transitioning industry at more attractive valuations than have been present in recent periods.

M&A will likely continue to be a tool of choice for boards and executive teams to fuel strategic plans. Availability of quality assets in the NEV and CASE technologies may be limiting. However, there is no shortage of demand for talent. Automotive companies will likely seek inorganic talent acquisitions to drive their new NEV and CASE products to market. M&A fundamentals remain strong. Automotive companies are coming off a decade of strong results, with stronger balance sheets and more capital to fuel strong M&A activity into 2023.

Key deal drivers

Return to capital discipline

As the automotive M&A market slows from a historical 2021, buyers are showing a more controlled investment approach. Seven of the top 10 deals in 2022 were strategic acquisitions compared with 2021, which saw five of the top 10 deals in YTD 2021 announced by financial buyers or special purpose acquisition companies (SPACs) — many investing in early-stage electric vehicle (EV) manufacturers with limited production and sales. 

We expect M&A to be driven by investments in EVs and CASE technologies. We anticipate disciplined investment approaches will foster more prudent capital deployment to capture shareholder value even as the competition intensifies. Automotive dealmakers will have to be diligent and creative — utilizing every tool in their M&A arsenal (including alliances and partnerships) — to stay ahead of the competition as the industry evolves.

Navigating uncertainty

2022 broke away from 2021’s market euphoria and record announced number of megadeals. The remainder of 2022 and the start of 2023 could be volatile. Continued geopolitical unrest suggests further instability in global supply chains. 

Automotive companies should navigate these turbulent times with a strong focus on cash flows and the strength of their balance sheets while fueling growth in new technologies and the transition to electric powertrains. It is during these challenging times that we see automotive companies enter strategic alliances, partnerships and joint ventures to diversify risk and share the cost burden of rolling new products and technologies to market. 

Speed to unlocking value from transformational M&A

Automotive dealmakers ride both opportunities and challenges of the transition to electric vehicles. Developing a roadmap leading to climate-neutral mobility and corporate responsibility is central to automotive EV strategy and corporate governance. Environmental, social and governance (ESG) priorities will help lead new M&A decision-making to secure the rare earth metals and key components required in electric vehicle manufacturing. It is also central to tapping into the value of acquired talent in the midst of the “Great Resignation.” Efforts on ESG initiatives and battling the competition for talent will continue to drive transformational M&A in 2022 and beyond.

Increasing resilience and security

Automotive companies face no shortage of challenges, including inflationary commodity prices, semiconductor supply challenges, the Ukraine war inflaming key commodity prices and the race to secure supply of rare earth metals for the EV transition. Deploying M&A over the next 12 to 18 months to manage these challenges and secure their own destiny will likely be key for the short and long term. Select transactions, such as Ford’s investment in GlobalFoundries to secure semiconductor chip supply and General Motor’s strategic collaborations with MP Materials and Vacuumschmelze to secure rare earth metals are good examples of this. 

“It’s during trying times that leaders emerge and there’s no shortage of challenges these days for automotive executives to navigate. The next 12-18 months will likely provide a good test to identify the winners and losers of past M&A activity — to see who is ahead of the pack and who invested wisely. Nonetheless, fundamentals remain strong and dealmakers will need to be disciplined and diligent in their investments to succeed in an automotive sector that has seen tailwinds turn into headwinds.”

— Paul Elie, US Automotive Deals Leader

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Paul Elie

Paul Elie

Industrial Manufacturing Deals Leader, PwC US

Michelle Ritchie

Michelle Ritchie

Industrial Products Deals Leader, PwC US

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