Automotive Capital Confidence Barometer
Mergers and acquisitions
With core economic fundamentals in place, the vast majority of automotive executives expect deal volume to improve – only 4% expect a decline.
Confidence in the likelihood of closing deals, the quality of acquisition opportunities and the number of acquisition opportunities have all increased markedly over the last 12 months. This confidence, combined with a clear focus on gaining market share, both in existing and new markets, through inorganic growth are clear indicators that a robust dealmaking environment is on the horizon.
Global deal volumes expected to increase
Seventy percent of automotive executives expect deal volumes to improve over the next 12 months. Deal volumes resonate from the alignment of core fundamentals: positive economic sentiment, enhanced credit availability, the imperative for growth and the expectation to create jobs. Growth in volume will also come from the returning stability of mature markets, which brings incremental growth in the BRICs and new frontier economies.
Q: What is your expectation for global M&A/deal volumes in the next 12 months?
M&A expectations continue to rise in automotive — driven by increased confidence in the number of opportunities, quality of opportunities and likelihood of deals closing
With core fundamentals in place to support M&A, 38% of automotive executives expect their companies will pursue acquisitions in the next 12 months, double the pursuit sentiment from a year ago (19%). This improvement in the number of companies expecting to pursue acquisitions resonates from the notable increase in the last 12 months in the number and quality of acquisition opportunities, as well as significant improvement in the likelihood of deals closing.
Acquisitions focused on gaining market share
The vast majority of automotive executives planning to pursue acquisitions are focused on gaining market share, whether in new markets or existing markets. To a lesser extent, executives will leverage acquisitions to access new technologies or leverage distribution networks.
A very small number (8%) of executives plan to utilize acquisitions to reduce costs and improve profitability/margin, a significant decrease from 12 months ago and a clear signal that industry executives are focused on growth.
Although acquisition capital will be allocated globally, emerging markets remain a priority for automotive
While mature markets are a desirable investment, mostly due to the perceived safety and quality of their underlying opportunities, automotive suppliers continue to look to the higher growth emerging markets for growth opportunities.
Emerging markets interest grows
Over the last 12 months, 54% of automotive executives indicate they have placed greater focus on investing in the BRIC (36%) and non-BRIC (18%) emerging markets as they search for new strategic opportunities. However, the mature markets continue to be an important investment destination as well.
M&A in slowing growth emerging markets requires more transaction rigor
While certain emerging markets have experienced slowing growth, executives remain largely optimistic about the opportunities they present, provided greater rigor is applied to dealmaking. Unlike their mature counterparts, emerging markets continue to rapidly evolve and transaction risk must be managed.
Valuation gap has increased over the past 6 months
Although the vast majority (75%) of automotive executives believe that the valuation gap between buyers and sellers is 20% or less, this has fallen from 83% 6 months ago. With economic fundamentals in place, sellers’ valuation expectations have risen at a faster pace than that of buyers’.
Valuation gap expected to widen further over the next 12 months
As economic conditions continue to improve and transaction volumes accelerate, this natural divergence between buyers’ and sellers’ expectations on pricing is expected to widen. Thirty-three percent of executives expect the valuation gap to widen over the next 12 months vs. 12% six months ago. This will likely be a short-lived phenomenon as buyers seeking inorganic growth and sellers looking to generate cash or optimize their portfolios will find an equilibrium that allows strategic objectives to be achieved.
Divestments enable corporate objectives
Recognized for their strategic value, divestments are an effective tool to address a variety of corporate objectives. Automotive companies will continue to shed nonstrategic and underperforming assets as they optimize their capital structures and focus on their core business. Fewer plan to use divestments to raise capital since credit is now more readily available. Activist shareholders and hedge fund owners within automotive companies may serve as a catalyst for increased divestures.
Business-unit sales are the preferred structure for divestments
Sale of business units emerged as the most popular form of planned divestment for automotive companies (33%), followed closely by sale of the entire business (29%). Although a spin or IPO of a business unit only accounted for 24% of automotive responses, this area of focus for divestments saw the largest increase from that of 6 months ago (15%).