Automotive Industry Update – Q2 2018

Automotive Industry Update – Q2 2018

Expanded Overview

Auto supplier M&A activity continued at a robust pace in the first half of 2018, although down modestly in the number of deals closed during the period versus the same period in 2017. This is a continuation of a trend we saw during the first quarter of the year. Trends impacting the appetite for M&A opportunities are generally segmented according to tailwinds and headwinds. Among the tailwinds are the following:

  • Supportive economic underpinnings – low unemployment, rising housing starts, relatively low interest rates (although headed up), consumer confidence tracking at historically high levels, and rising levels of disposable income per capita characterize an economic picture of relative strength in spite of the consensus view that we are very late in the current positive economic cycle
  • Tax reform – passage of The Tax Cut and Jobs Act, with the stimulative impact of lower rates offsetting restrictive elements such as limits on interest and NOL deductibility
  • Demand/supply imbalance – for several years now, the demand for high-quality acquisition targets has significantly exceeded the supply of those assets available to be acquired, hence ever-escalating valuation multiples. Corporate buyers are leveraging strong balance sheets while financial buyers continue to experience unprecedented levels of fund-raising success, creating a competitive deal market which favors the well-positioned seller

Headwinds to M&A activity include:

  • Declining vehicle sales volumes – having peaked in 2016 at approximately 17.5 million units, sales of light vehicles in the U.S. are expected to decline steadily through 2021, with the trough occurring somewhere between 16.5 million units (a 6% decline from peak) and 13 million units (a 25% decline from peak), depending on which analyst you believe
  • Shifting macro factors – escalating gas prices, tightening monetary policy (i.e., rising rates), rising raw material costs, and shifts toward more restrictive trade policies (including tariffs) create an environment of increasing uncertainty within a complex, global automotive value chain

Against this backdrop of shifting forces impacting auto suppliers, there are a number of prevalent trends which are driving M&A activity and will continue to do so into the foreseeable future. These include:

  • Technology advancements – the growing emphasis on automated, connected, electric and sharing (ACES) vehicle technologies is increasingly driving M&A activity as both OEMs and suppliers search for differentiated and proven technological advancements that exceed those obtained from in-house R&D efforts
  • Globalization and vehicle lightweighting trends – pressure by OEMs for suppliers to be able to efficiently support global vehicle platforms is not a new dynamic within the supply chain, but one which continues to influence M&A activity nonetheless. Likewise, regulatory policies mandating escalating fuel efficiency targets continue to drive acquisition activity as suppliers search for technologies that will enable lighter vehicles, particularly in light of driver-assist and communication products that add to a vehicle’s weight
  • Evolving product portfolios produce more spin-offs – as suppliers shift resources to support product portfolios more reflective of ACES technologies, we are increasing seeing those companies spin-off business units containing more traditional mechanical, non-core products

For the remainder of 2018, we believe we will see a continuation of the healthy M&A momentum experienced in 2017 and through the first half of 2018. Well-capitalized suppliers and private equity buyers with deep pockets will (i) increasingly seek ACES technologies that leap frog those of competitors, (ii) look to enhance their global supply capabilities, (iii) pursue lightweighting technologies that assist OEMs to achieve tightening emissions standards, and (iv) spin-off business units that fail to contribute to long term strategic objectives, all while being mindful of shifting economic and geopolitical forces beyond their control.

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