Nearly a third of companies view the risk of economic slowdown as the primary threat to growth plans, but the majority of companies are using M&A to reshape their portfolio, according to the most recent EY Capital Confidence Barometer.
“Globally, Europe is starting to have flat domestic product growth, and China is slowing significantly as well,” says Brad Hehl, U.S. Central Automotive Transaction Advisory Services Leader at EY in Detroit. “These trends will affect multinationals in Detroit. On a broader level, the uncertainty of tariffs is already proving to be a problem. Then we need to consider what could happen if interest rates were to rise, or gas prices were to increase. Any of those factors may cause auto companies to pull back on potential mergers and acquisitions.”
EY surveys transportation executives every six months to gauge their opinions on the market. Hehl has extensive transaction experience with automotive suppliers and OEMs, as well as other automotive-related industries.
We spoke to Hehl about dealmaking trends in the automotive space and what lies ahead for M&A activity in 2019.
What current trends in the Detroit market are driving M&A activity?
In the auto industry, we’re seeing more investment into mobility and technology businesses. For example, ride hailing and sharing are continuing to attract the attention of automotive companies as they position themselves to be more closely connected to the customer in the evolving mobility landscape.
Automotive suppliers are also investing in advanced drive-assistance systems, electrification, light-weighting and other capabilities to support autonomous and connected vehicles. Some OEMs and suppliers are acquiring venture capital-backed startup businesses, and some are creating their own VC funds to invest across a portfolio of startup technologies.
Making these bets on future technologies requires both vision and capital. Companies continue to critically evaluate their product portfolios and divest what is no longer deemed strategic. This capital is then often redeployed into higher-growth technologies, products and regions to sustain or develop a competitive advantage.
How is the current state of the auto industry affecting deal volume?
OEMs and suppliers are making strategic investments to capitalize on automotive-technology industry convergence. The quest to acquire technology is driving significant investment activity around alliances and joint ventures, but as headwinds build regarding vehicle production volumes, tariffs and labor contracts, companies will tend to focus internally on operations and rightsizing rather than ambitious M&A plans, leading to an overall slowdown in deal activity.
What is the typical buyer’s mindset in 2019?
Buyers are beginning to benefit from a softening of valuation multiples as we pass the peak of the cycle, but that softening typically tends to reduce the availability of healthy, high-performing targets.
It does usher in more opportunistic private equity buyers, who may have an operational focus and higher risk tolerance to hold automotive assets through an economic cycle. Of course, buyers need to have an eye on the evolving industry landscape and its underlying technologies. They need to be focused on the future of a product and the technology life cycle, so whatever they’re investing in requires a thoughtful technology road map as well.
Lastly, buyers investing in automotive companies today need to perform robust scenario planning as a cyclical downturn (whether shallow or deep) during the first few years after a deal is completed now seems to be on the horizon.
What are sellers thinking about?
For sellers, the current climate is complex. We are still seeing deals trading at or above historical averages, yet deal pricing is also clearly lower than the peak.
The complicating factor is that a decision not to sell in the current market may well mean an extended holding period beyond the next cyclical downturn. That could mean deferring a sale through the downturn and then for some time after the downturn as production, margins and valuations return to more robust levels.
Overall, for compelling deals, there is always a market. We’re encouraging our buy-side clients to focus on differentiated technologies and customer diversification and our sell-side clients to critically evaluate their businesses and competitive positioning, as monetizing the business or non-core assets may be the best alternative to protect and build value.
Preparation is key for sellers. A compelling story for growth, technological niche, margin enhancement, customer diversity and robust financial information often drives the best outcome.
