Automotive Capital Confidence Barometer

Mergers and acquisitions outlook

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Amid uncertainty about the global economic outlook, companies are increasingly wary of acquisitions and their perceived risks.

Just 19% of automotive respondents now expect to pursue acquisitions over the next 12 months, down from 22% in April and 39% a year ago. It is not just a lack of confidence in the business environment that is holding companies back — many are also concerned about the gap between their valuation of potential acquisitions and the prices sought by sellers.

Expectations to pursue acquisitions declined steeply in North America, with 27% of respondents planning to pursue acquisitions, compared with 40% in April. In Western Europe, 25% plan to pursue acquisitions in the next 12 months, compared with 32% in April, a decrease largely explained by the Eurozone crisis. The sentiment of respondents in Asia-Pacific remains significantly more conservative, with only 6% of respondents from the region planning to pursue acquisitions, down only slightly from 7% in April.

Although there has been a certain amount of M&A activity driven by the North American automotive recovery as well as the drive for global growth from Asia, many executives are waiting for a sustained recovery before taking action, especially regarding large, transformative transactions.

Do you expect your company to pursue acquisitions in the next 12 months?

Deal valuation gap deters pursuit of acquisitions

Thirty-three percent of automotive respondents cited deal valuation gaps as the primary reason not to pursue an acquisition. Low confidence in the business environment is also indicated as a significant factor impacting deal activity.

What is the primary reason for not pursuing an acquisition in the next 12 months?

Respondents indicate a significant shift in sentiment on asset prices. Thirty percent of automotive respondents now believe deal prices will decrease, up from 6% a year ago. Similarly, fewer respondents now expect prices to rise than just six months ago, potentially slowing the pace of deals as buyers pause in anticipation of falling asset prices.

What do you expect the price/valuation of M&A assets to do over the next 12 months?

Although increasing market share in new and existing markets remain key drivers of planned deal activities, 28% of automotive respondents indicated cost reduction and improving margin as a key acquisition driver, a significant increase from 14% in April.

What are the main drivers of your company’s planned acquisition activity in your chosen market/country? (Select two)

Among those companies that do expect to engage in M&A, deal sizes remain small, reflecting an ongoing aversion to risky, transformational transactions. More than 94% of automotive respondents say that they will do deals worth less than US$500m, and 52% say they will do deals under US$50m. This suggests that, where deals are being considered, they will extend existing businesses and fill strategic gaps.

What is the expected deal size?

Where will the deals be done?

Top investment destinations, according to our respondents, span developed and emerging markets, as companies seek to increase their exposure to markets that offer better growth opportunities.

There is increasing evidence that developed markets are regaining momentum as top investment destinations.

Top automotive sector investment destinations:

  1. Germany
  2. US
  3. China
  4. India
  5. Mexico

Fewer divestments expected after period of high activity

There has been a decline in the number of companies planning to make divestments in the next 12 months, from 25% in April to 16% today. Over the past two years, many automotive companies have gone through the process of optimizing their portfolios and offloading those assets that did not fi t their overall strategic objectives. This decline represents the completion of some of these divestitures as well as a realization that not all automotive deals are successfully closing in the current market. Some sellers are potentially awaiting a better market window.

Is your company likely to make an asset sale/divestment in the next 12 months?

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