In the first half of 2020 automotive M&A activity faced uncertainty not seen since the Great Recession as deal value and volume declined 54% and 16%, respectively, from H1 2019.
Investments in CASE technologies (connected, autonomous, shared, electrified) continued to drive deal activity in the first half of 2020 as vehicle manufacturers and component suppliers alike announced large deals. The COVID-19 pandemic significantly impaired activity in the second quarter of 2020, but with its disruption come new opportunities for consolidation, executing inorganic strategic initiatives and distressed M&A.
“The first half of 2020 saw automotive dealmakers continue their search for attractive assets to strengthen their technological capabilities in CASE technologies. Despite the COVID-19 pandemic, we expect technology to be a central driver of M&A in the second half of 2020 while a new deal landscape fosters tech-based alliances, strategic consolidation and distressed opportunities.”
Vehicle manufacturing experienced the lowest decline in volume among the auto sub-sectors and saw a slight increase in value compared to H1 2019 as OEMs continued their investment in CASE technologies. This includes two deals from Volkswagen AG as they bolster their electric vehicle strategy in Asia while also contributing the largest deal of H1 2020 with their acquisition of Navistar International as they look to expand their commercial vehicle offerings. Financial investors remain attracted to auto-tech assets as H1 2020 saw Evergrande, a Chinese real-estate investor, hedge its real estate investments by purchasing the remaining uncontrolled interests in National Electric Vehicle Sweden AB, which manufacturers electric vehicles among other electrification components.
Parts & components manufacturing contributed the most to the sector in terms of the deal value and volume in H1 2020, driven by five of the top 10 deals in Q1 2020. It is also the only sub-sector to witness volume growth (8.5%) from H1 2019. We see this sub-sector continue with investments in new technologies as evidenced by VW’s acquisition of Gotion High-Tech, a battery manufacturer, and BorgWarner’s acquisition of Delphi Technologies to strengthen its electric powertrain capabilities. We expect continued auto-tech investments and alliances, but also anticipate an uptick in supplier consolidation for the remainder of the year as challenged component suppliers become acquisition targets for corporate buyers looking to make strategic investment and as private equity investors look for good opportunistic plays.
Strategic investors contributed 94% and 79% share of total deal value and volume, respectively, in H1 2020. The top 4 deals of the year are all strategic investors, driven by the $5.2 billion in acquisitions executed by Volkswagen AG. While financial investors’ share of the deal activity has remained within its historical range (20-30%), we believe private equity is well positioned for the second half of 2020. At a time when the price of assets should experience a correction, financial investors have access to record levels of capital for deals. Those willing to consider how this health crisis could change or accelerate the direction of the automotive sector will be better positioned to make deals with lasting impacts and returns similar to their approach in the aftermath of the Great Recession.
The automotive sector has been one of the most heavily challenged sectors by the measures implemented to adapt to COVID-19. A steep short-term drop in demand and disrupted (and complex) supply chains have pressured a sector already dealing with enormous changes to its traditional business model in the form of electrification, autonomous vehicles and ride-sharing services. Deal makers are having to refocus their M&A strategies to reconnect production and supply chains, all while not losing sight of their technology strategies and investments as the pandemic accelerates adoptions of new technologies. The industry will face a difficult 12 to 18 months with 2020 global GDP growth expected to decrease 6-8% from last year, record unemployment levels, and the threat of a second wave of COVID-19 creating supply disruptions and workplace health restrictions. But through these difficult times winners and losers will emerge that will drive M&A activity for the remainder of the year.
Vehicle manufacturers who have made strategic bets to transform their business models from the introduction of CASE technologies will continue to look for M&A opportunities to help strengthen their competitive position, but also fund their existing investments. With banks cautious to extend credit to capital intensive automotive players, M&A will serve a dual purpose. Divestitures of non-core assets will enable realignment of business strategies to foster competitive advantages and will provide the capital injection needed to support new investments in technology. Alliances and joint ventures, which have become more prominent in the last few years, will continue as manufacturers look to share the costs of development and hedge the risk of market acceptance for their technologies.
Component suppliers face a challenging environment and we anticipate a significant rise in acquisitions resulting from distressed opportunities later in 2020 and into 2021. Some suppliers may be forced into M&A to secure supply chains, and others into investments that can accelerate their digital transformation. Regulatory and sustainability driven policies will further increase M&A demand to strengthen capabilities and supply in next generation materials and technology, and the continued use of M&A to access talent and specialized skills – particularly to ensure the best results from technology investments.
But the disruptions faced from the current health crisis are not limited to vehicle and component manufacturers. Retailers, wholesalers and businesses with service offerings in repairs and maintenance all face uncertainty as new ways of being force change within the industry. Those who have made investments in technology to help facilitate contactless purchasing and e-commerce or those who have led the way in crafting what this sub-sector will look like in an age of electric and autonomous vehicles are anticipated to emerge as winners as consolidation of this sub-sector continues.
The second half of 2020 will certainly be an exciting period of time in the automotive industry, albeit clouded by economic unknowns and health and social matters facing society. Similar to the aftermath of the Great Recession, it will be critical for government stimulus to target the most vulnerable channels of the automotive industry, and broader economy, to sustain a recovery. We’ve seen swift and significant governmental actions, but more is needed to combat a second wave and mitigate a prolonged period of high unemployment which would deteriorate consumer demand. Fortunately, key players in the industry have entered this recession with stronger balance sheets and financial standing than that of the Great Recession, bringing hope that a rebound in the second half of 2020 will materialize.
The information presented in this report is an analysis of deals in the global automotive industry. Deal information was sourced from Refinitiv and includes deals for which targets fall into Refinitiv’s automotive mid-industry. Certain adjustments have been made to the information to exclude transactions which are not specific to automotive or incorporate relevant transactions that were omitted from the SIC industry codes.
This analysis includes all individual mergers, acquisitions, and divestitures for disclosed or undisclosed values, leveraged buyouts, privatizations, minority stake purchases, and acquisitions of remaining interest announced between July 1, 2017 and June 30, 2020, with a deal status of completed, partially completed, pending, pending regulatory and pending completion, and excludes all rumors and seeking buyers. Additionally, transactions that are spin-offs through distribution to existing shareholders are included.
Percentages and values are rounded to the nearest whole number which may result in minor differences when summing totals.
Industrial Products Deals Leader, PwC US
Automotive Leader, PwC US