The automotive sector finds itself in a state of evolution, which has led to a flurry of mergers and acquisitions (M&A) as companies position themselves to lead the charge in innovative technology solutions, particularly in automation, electric vehicles and urban mobility.
Industry leaders in markets such as Detroit, Shanghai, Silicon Valley and Israel find themselves on the cutting edge of the technology curve, snapping up tech companies in an effort to get ahead.
Giants in the industry, like Ford and Continental, are competing with tech giants like Intel, Google and Tesla in the M&A field, which has become a battleground “where the future of the automotive industry will be settled,” a Consulting.US report notes. Up-and-comers like Nio, a Chinese start-up that plans to offer an electronic car for half the price of a Tesla, spur further competition. The battle is, in large part, about who can incorporate emerging technologies — including artificial intelligence, augmented reality and smart-car systems — to make the car of the future safe, sleek, efficient, electric and high-margin.
In part one of our series on M&A in the automotive sector, we discussed the broader state of this trend and the role of technology in the industry. In this article, we will dive into the market factors that affect M&A in the automotive sector and the real estate implications of these deals.
How can organizations position themselves to acquire and be acquired? What steps are necessary once organizations split or acquire other companies? How do broader market factors affect flux and innovation in the automotive sector? And, how can organizations restructure physical real estate to maximize cost savings and productivity while minimizing risk?
Positioning to Acquire or Be Acquired
The extended recovery from the Great Recession, which is poised to be the longest expansion in U.S. history, has hit a boiling point in recent years. The auto sector, as with the many industries in the broader economic landscape, has reached pre-recession levels of investment and pricing, turning what once was a market with not enough investment into a tight market with increasingly high multiples. Businesses in the manufacturing sector are now priced, on average, at EBITDA multiples of 6.5, one of the highest multiples by industry.
This leaves fewer organizations in a position to acquire other businesses in the sector, small or large, with Fortune 500 companies better capitalized. And the market is highly competitive. If well-positioned, every small tech startup with a great idea will court multiple organizations before being acquired.
A downturn is inevitable, but there are few signs that it will happen soon. A shift in the market would make heavy investment in technology harder — but at the same time, innovative technology helps trim margins, which is essential for continued success in the industry.
In a tight market, how can organizations in the automotive manufacturing sector position themselves to acquire — or be acquired?
- Align internal goals. High-profile transactions like GKN’s recent hostile takeover by Melrose Industries demonstrates the highly competitive world of manufacturing mergers. GKN was poised to merge with Dana Inc. before shareholders voted by a spare majority to accept a competing offer from Melrose, all while stating they believed the offer “fundamentally undervalues GKN.”While tech start-ups often come into the sector with the explicit goal of growing enough to be acquired, legacy organizations must reconfigure their internal goals and leadership to support the growing need for tech solutions or risk being acquired in a situation in which no one is entirely happy. Splitting into Old School and New School companies that each have a clearer market focus is one way to achieve this, as we discussed in part one of this series. Re-positioning the company, or its divisions, specifically with the goal of being acquired is another option.
- Do their due diligence. Buyers need to put themselves into position to acquire lucrative tech startups and smaller manufacturing companies. Acquiring, after all, allows organizations to immediately add developed products and tools to their line-up. But this move must come after a thorough due diligence process. Real estate specialists, like those at Colliers, can acquire data, offer lease abstraction services, assess market conditions, evaluate the risks and opportunities of acquiring or merging, and provide valuation for the organization in question. More broadly, they can identify possible locations for expansion or evaluate the synergies of multiple locations. Thorough due diligence is necessary and allows shareholders and leaders to enter a transaction knowing exactly what they’re getting and exactly what they should do post-transaction.
- Shift strategy. Small shifts in acquisition strategy can create immediate value, and real estate plays a big role here. Real estate is typically 5-10% of a business’ total capital expenditures. Monetization and sale leaseback of owned assets offer an immediate capital boost right out of the gate, giving companies on the acquiring end an infusion of cash that they can, in turn, re-invest. Shifting strategy to focus on real estate optimization and monetization, even in the due diligence stage, can lead to more efficient deals and free up capital, almost immediately.
Positioning After the Deal
Post-acquisition, organizations find themselves in a transformative period, one which should be addressed during the due diligence process. This period involves addressing questions such as:
- Will we keep the acquired organization’s leadership structure, or consolidate leadership?
- How do we integrate and consolidate the acquired organization’s real estate and facilities?
- How do we continue to grow the acquired platform, and what talent is required to grow?
- What are the CRE implications of acquired or redundant facilities?
- In re-structuring our business to incorporate a new organization, how do we minimize risk while maximizing utility and cost savings?
One example of a successful acquisition is the Tenneco acquisition of Federal-Mogul. Incorporated into this transaction was a restructuring of Tenneco into two separate companies — one focused on aftermarket and ride performance, and the other on powertrain technology.
The acquisition allows Tenneco to capitalize on go-to-market capabilities in regions where Federal-Mogul had built a strong presence, including the Americas and the EMEA region, and capitalize on important market trends, including aftermarket growth in the Asia Pacific region and developing technologies in mobility, autonomous driving and electrification. It also makes the business more investor-friendly, with two separate companies driving toward separate goals and product development.
Transactions like these, which happen quickly, are most successful with the guidance of real estate specialists to evaluate real estate opportunities and identify economies of scale. Where are locations most needed? What locations are ideal to maximize distance to suppliers and workforce availability? What lease negotiations are necessary to hedge risk in the long and short term? As company shareholders work with specialized, industry-leading experts to consolidate and monetize assets, they position themselves to be more immediately successful in the fast-paced world of automotive sector M&A.