Shift Magazine - Issue 1 2018 - 17

Deals activity surges, as investors
bet on the car of the future

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The automotive industry's appetite for deal-making is growing, and
advanced technology, intellectual property and visionary innovators are
all on the menu.
Investments double The $30 billion in mergers, acquisitions and
other investments in the auto sector announced in the first three
months of 2018 was more than double the quarterly average over the
past three years. Momentum built in 2017 is continuing during the
first three months of 2018, with Chengdu Qianfeng Electronics'
announced acquisition of Beijing Electric Vehicle for $4.5 billion.1
The drivers of these transactions are as diverse as the buyers and
sellers themselves, but one thing is becoming clear: companies are
looking to the future--and betting on it.
Last year's biggest deal is a clear indication of this trend. Intel's $15.3
billion acquisition of MobileEye--an advanced driver-assistance
system providing warnings for collision prevention and mitigation-accounted for nearly 32% of the year's total disclosed deal value.2

Another challenge facing potential buyers of automotive technology
companies is that much of the technology that will transform the car in the
coming years remains unproven, making some investments risky. The
issue is more complicated than whether a system or component will fulfill
expectations. In some cases, there are still competing standards around
certain technologies with no clear winner. Furthermore, the jury is still out
on which technologies will dominate in a world of connected, autonomous,
and electric cars. For example, how quickly will 5G cellular networks roll
out? Or, how aggressively will governments invest in smart infrastructure
to facilitate greater levels of autonomy?
But this isn't just a case of big technology companies buying a stake in auto
suppliers producing next-generation components and systems. Indeed, a
PwC analysis found that 50% of 2017's automotive technology acquisitions
were carried out by non-tech companies. Parts manufacturers, for example,
have an eye on the future of the industry as well, as illustrated by Aptiv's
$450 million acquisition of nuTonomy, a provider of autonomous vehicle
software and mobility solutions.4
Venture capital funds have made significant investments, too--and not just
to fund on-demand transportation apps, where they have historically been
an instrumental source of funding. Just like tech firms, automakers and
suppliers, they're focused on the technology that will change the way we
drive, including autonomous-driving systems and electric drivetrains.

Competition ramps up around next-gen auto plays Fully
autonomous vehicles may still be several years away, which may seem
like a long way off. But the acceleration in M&A activity is a signal
that forward-looking auto and tech companies are already making
moves to prepare. This means any company that envisions a place for
itself in the auto industry of the future needs to start acting now.
Standing on the sidelines is the first big risk that companies, private
equity firms and venture capitalists with an interest in tomorrow's
auto industry face, but it's not the only one. They'll also need to
navigate high valuations. On average, automotive technology deals
have featured higher ratios of enterprise value to earnings before
interest, taxes, depreciation and amortization than non-technology
deals in the space. Put simply, competition to buy and invest in
companies with technology embedded in the cars of the future is
rising, pushing prices up. Just consider that the auto tech deal value
nearly doubled from $12.9 billion in 2016 to $22.0 billion in 2017.3
The bottom line is that attractive deals are getting harder to find, and
are likely to come at a premium.

Culture clash? Lastly, acquirers, especially those eyeing targets outside
of their industry need to be mindful of how critical it is to make a good
cultural and people fit--and achieving that is not always an easy task.
PwC's 2017 M&A Integration Survey5 found that the importance in gaining
access to management and technical talent as a deal objective has more
than doubled (from 15% in 2013 to 33% in 2017), yet there has been a 20%
decline in completely achieving this goal (from 36% to 29%). With a high
number of non-technology companies making acquisitions to secure
cutting edge products or systems, the need for company cultures to
combine well is especially acute.

Read PwC's full first-quarter 2018 Global Automotive Deals Insights
analysis at www.pwc.com/automotive.

PwC, "PwC Deals: Global Automotive Deals Insights Q1 2018" and "PwC Deals: Global Automotive Deals Insights Year -End 2017," April 2018 and January 2018;
www.pwc.com/automotive

1, 2, 3, 4

PwC, "M&A Integration: Choreographing Great Performance: PwC's 2017 M&A Integration Survey Report," March 2017; https://www.pwc.com/us/en/services/deals/library/ma-integrationsurvey.html

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Table of Contents for the Digital Edition of Shift Magazine - Issue 1 2018