Top 8 Forecasts for the 2018 Automotive M&A Landscape

by Foley & Lardner LLP
Contact

2017 was a strong year for the automotive sector and related M&A activity, and we’re looking to generally continue that momentum in the year ahead. The new automotive ecosystem, in which traditional OEMs and automotive suppliers collaborate and integrate with established and emerging technology companies, continues to mature in many ways. Buyers across these sectors are leveraging strong balance sheets, relatively low borrowing costs and eager outside investors in order to participate in the race towards the development and full-scale market adoption of autonomous and connected vehicles.

Below are our top forecasts for 2018 that will affect the automotive M&A landscape:

  1. Changes to NAFTA remain a possibility that could have adverse consequences for the automotive industry in North America. The United States, Canada and Mexico are continuing discussions to modify the agreement. U.S. officials have not indicated that they intend to withdraw from NAFTA, despite continuing disagreements among the parties.
  2. Interest rates have ticked up slightly and additional modest increases are forecast as solid economic reports continue and unemployment rates continue to be low. Normally, rising interest rates can slow deal activity as buyers who typically rely on debt face higher borrowing costs and lower returns, which especially impacts financial buyers.
  3. With the passage of the Tax Cuts and Jobs Act, there is a 20% deduction for pass-through entities like LLCs, and lower top rate will be welcome changes to dealmakers this year.
  4. At a recent Original Equipment Suppliers Association conference, Chief Economist of General Motors G. Mustafa Mohatarem was optimistic about the global automotive industry, citing current U.S. economy strength and growth in China, the continued debt-crisis avoidance in the European Union and nearly ended recessions in Russia and Brazil. Mohatarem also cautioned that interest rate policies and the risk of future labor shortages in the industry are possible disruptors to the current U.S. production rate. The general consensus from the conference was that the next cyclical down cycle is out there, but panelists remained optimistic if not cautionary for the near term.
  5. Trends in valuation multiples with automotive deals will remain strong. According to PricewaterhouseCoopers, EBITDA (earnings before interest, taxes, depreciation and amortization) multiples for the first half of 2017’s automotive deals generally ranged between five and 10, with those in the automotive electronics sector drawing up to 25. In contrast, PwC found deal multiples in the interiors sector averaging at five times EBITDA, due partly to automakers bringing work in-house. We predict these trends will continue and that valuations for underperforming sectors will stabilize or rise as buyers spot value opportunities and as technology continues to spread across the industry.
  6. Automated, connected, electric and sharing (ACES) automotive technologies and business models will continue to be a top driver in M&A activity. Detroit OEMs and automotive suppliers have established Silicon Valley presences for access to technology, and many Silicon Valley technology companies are expanding to Detroit for automotive and manufacturing reasons. Large suppliers have accelerated their R&D activities by acquiring existing teams and technology companies are helping to drive deal activity and valuations higher.
  7. The M&A activity for component suppliers has exploded due to auto-tech deals and we can expect this to continue. Large suppliers will continue to accelerate their R&D activities with ACES automotive technologies by acquiring existing teams, and traditional technology companies are becoming increasingly invested in this space and helping to drive deal activity and valuations higher and higher.
  8. Lightweighting will continue to gain importance and bolster M&A activity. Albeit increased regulatory uncertainty in the U.S. and the Trump administration beginning to roll back the Obama administration’s CAFÉ targets, the rest of the world continues to adopt aggressive emission targets. Driver-assist sensors and infotainment features add weight to vehicles, and lightweighting materials will need to make up for that. The Center for Automotive Research indicates that by 2025, around five percent of the curb weight of the U.S. fleet will be added to every vehicle for these safety and performance improvements, including an additional 200-300 pounds per vehicle for automated driving features.

Although there are various technological, legal and consumer-driven hurdles on the horizon, demands and evolutions in each of these spaces should drive deal activity and valuations in 2018 and beyond. There may be disagreements about the realistic timeframe for achieving full (Level 5) vehicle autonomy, but there is a clear consensus that the journey may be lucrative for those who can keep up. Staying on the sidelines is not a long-term option.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Foley & Lardner LLP | Attorney Advertising

Written by:

Foley & Lardner LLP
Contact
more
less

Foley & Lardner LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.