By Mustafa Bayramli (Wharton), Gurneek Gill (UCL), Nihat Anwar (Stockholm School of Economics)
Photo: Carlos Aranda (Unsplash)
I. Industry Background
Companies involved in the design, development, and manufacturing of automobiles, all belong to the automotive industry. In general, the industry can be divided into two large segments, namely, commercial vehicles and passenger cars, with the latter being the largest contributor to total sales.
The global market is expected to be worth $529.25 billion by 2028, with an anticipated CAGR of 3.8%. Asia is the largest automotive region worldwide in terms of sales and production, particularly by considering the rapid growth of the Chinese market. North America and Europe also contribute a large part of total sales and production. In terms of market capitalization, the largest automakers are Tesla (USA), Toyota (Japan), Volkswagen (Germany), Daimler (Germany), and BYD (China) - showcasing the significance of the aforementioned three regions.
Due to the COVID-19 pandemic, global shutdowns and weakened demand have negatively affected supply chains and subsequently inhibited production. Though the industry took a substantial hit, global car sales are expected to increase by 9% in 2021 as the economy recovers. However, 2020 still marks the third consecutive year with negative growth in global automotive vehicle production. Meanwhile, global electric vehicle production and sales rose sharply in 2020. The surged reception of electric vehicles, as well as hybrid, self-driving and semi-autonomous cars, is continuing to boost growth. Other, and more general market growth factors include, inter alia, overall macroeconomic activity and technological advancements.
While the pandemic caused a notable disruption, M&A activity is currently high, and many noteworthy deals have taken place in recent months. In fact, 2020 saw almost 45,000 announced M&A deals with an aggregate value exceeding $3.4 trillion, with the push towards electrification and automation being the main driver.
II. Traton - Navistar
The Traton group, a Volkswagen Group subsidiary, are a global leading commercial vehicle manufacturer and on 7th November 2020, announced that they would be entering a definitive merger agreement which will see them become official owners of Navistar, the US based American holding company specialising in truck making. Having already owned 16.7% of Navistar’s outstanding shares, it made sense for Traton to purchase the full 100% given the success that the two companies have seen together in their strategic alliance. Since partnering in 2017, both companies benefited greatly via increased purchasing scale and the assimilation of their innovative technologies. However, this full purchase will create an immense global opportunity for both firms since Traton have a strong foothold in Europe and South America, while Navistar are particularly robust in North America. Furthermore, Matthias Gründler, the CEO of Traton, also mentioned how this deal would “expanding Traton’s reach across key truck markets worldwide, including scale and capabilities to deliver cutting-edge products.” Similarly, Navistar commented by saying that they were glad to be giving “immediate and substantial value to shareholders” and the firm will look to continue the combined growth already achieved.
The global commercial vehicle industry is one that is fast growing and evolving. Despite the challenges that COVID-19 brought in 2020, Automotive M&A deal volume rapidly picked up in Q4 2020 and that has continued into 2021 as the pandemic comes to an end. Moreover, deal volume has been largely correlated to investment in New energy vehicles and invention and technology amongst all automotive sub-sectors. Given that Navistar pride themselves in leading the world in delivering carbon-reducing technologies, it is no surprise that Traton purchased the remaining shares and it is likely many more similar M&A deals will occur under the same rationale.
III. FCA - PSA Group
On January 16th 2021, Fiat Chrysler Automobiles NV and Peugeot-maker PSA Group were finally able to conclude their merger of equals; creating the third biggest manufacturer in the world by revenue, with a yearly turnover of £144 billion. The new entity is set to be called Stellantis NV and both companies will be glad to see 99% shareholder approval after 2 long years of talks. Within its profile, Stellantis will be able to globally represent a huge compilation of brands from the likes of Jeep and Peugeot to luxury-end makers such as Maserati and Alfa Romeo. More importantly however, Stellantis will look to reset and conquer some of the challenges that lie ahead in the ever evolving global car business; largely from the shift towards innovation in the electric vehicle space. Moreover, given the negative impact that COVID-19 had on the automotive industry in parts exports and manufacturing, it is no surprise that plans to merge were accelerated at the final stage and $6 billion yearly cost synergies have already been estimated due to the combination of engineering and economies of scale.
Nonetheless, the merger does not come without its challenges which consist of dealing with underachieving factories, trailing brands and potential cultural clashes. Furthermore, their direct competitor General Motors is piling investment towards the electric vehicle space meaning Stellantis will have to swiftly match this to compete in this market space.
Whilst ‘megamergers’ like this are rare and becoming increasingly unpopular from a financial standpoint, the strategic rationale behind it is not. There are clear shifts in consumer inclinations motivated by the pandemic and investment in Electric and autonomous vehicles are set to become more critical than before and M&A deal volume in the automotive industry has been driven by this as companies look for capital/opportunity for to appropriately expand and innovate operations to meet new market demands.
IV. Nikola - VectoIQ Acquisition Corp.
On June 3, 2020, Nikola, an Arizona-based maker of hydrogen-powered semi-trucks, announced that it has completed its SPAC (Special Purpose Acquisition Company) merger with VectoIQ Acquisition Corporation. The SPAC deal, which provides the target with more than $700MM through the business combination and private investment in public equity, puts the pro forma enterprise value of the merger at $3.3BN. Shares of the VectoIQ, which are now trading under the ticker of NKLA, jumped by 11% in Nasdaq trading on the day of the news. The long-term financial health of the company, however, greatly depends on whether Nikola will be able to deliver on its ambitious plans: the company predicts that it will start the delivery of short-range trucks and longer-range semi-trucks running on hydrogen by late 2021.
According to sources, Nikola will generate much-needed funds in a much shorter timeframe and more cheaply through the SPAC merger than through a traditional IPO route. Extra cash from the deal will be used to fuel the expansion of the company’s production capacity and product portfolio and deliver on pre-order reservations for nearly 14,000 electric semi-trucks, representing $10BN of potential future revenue.
V. Carwow - Wizzle
On June 15, 2021, carwow, a UK-based platform for buying new and used cars, announced the acquisition of Wizzle. Although financial terms were not disclosed, investors seem to have a good sense of the rationale behind the deal. Carwow expects to integrate Wizzle’s expertise in used car selling service to create a one-stop-shop for users looking to find their new car and sell their old car. According to the target’s claims, the company boasts a network of more than 2,000 dealers using its platform and over 1,500 cars being sold and bought on a monthly basis. Leveraging potential synergies arising from the shared vision and combination of state-of-the-art technologies, carwow will aim at not only making it easier for customers to purchase vehicles but also offer services that “give dealers an advantage in the digital world.”
VI. Future Outlook
Today, automotive companies are in a harsh situation as the pandemic continues to test supply chain resilience. Though the economy is slowly rebounding, the global sector was identified by the largest number of global respondents in the EY Global Capital Confidence Barometer (CCB) as facing the highest impact from the pandemic. Going forward, many believe that these companies will enter a time of more uncertainty, including a notable increase in costs to make their supply chains more robust. However, it is expected that some of these costs will be partially offset in the long run by the benefits of technological advances, particularly in the fields of automation and electrification.
Nevertheless, automakers are expected to face intense changes in the coming decade. In short, what has been known as the automotive industry, could be known more broadly as the mobility industry - the next generation of products and services related to the transportation of people and goods combined with new technologies and an increased focus on mobility and connectivity. This transformation will continue to test automotive executives, and a long-term focus on digital customer engagement, artificial intelligence, and robotic process automation, are all considered key factors to remaining competitive. Indeed, many of the current and future megatrends are expected to stimulate transaction activity. However, mobility startups are currently in a dire situation as new funding and investment exits have declined. Furthermore, almost half of the automotive executives argue that valuations are coming down. Most of them are also focusing more on business resilience when evaluating target companies. Nonetheless, as the situation normalizes and automotive companies, particularly new mobility players, adapt to the new normal, analysts expect a gradual pickup in investments and valuations.
All in all, the automotive industry faces short-term operational tests combined with long-term strategic challenges. Indeed, the need for restructuring and operational changes in a time of financial distress, creates favourable conditions for an upsurge to M&A activity as the sector rebounds. In addition, future disruptive challenges are continuing to be reflected in industry deals as they pave the way for new strategic alliances.