Self-driving cars spur heavy auto deal traffic in Silicon Valley

Bloomberg

The auto industry’s self-driving revolution has spurred the biggest two years of car-supplier takeovers in a decade, with more coming as parts makers struggle to keep up with
the pace of technological transformation.
The total value of automotive-supplier deals in 2015 and 2016 was $74.4 billion, according to data compiled by Bloomberg, with each of those years far exceeding the $17.7 billion annual average in the previous 10 years. The number of transactions valued at $500 million or more also skyrocketed to 18 last year, triple the level of the previous decade. There have been 11 such deals so far this year.
The driving force behind the wave of consolidation is the pressure to keep up with the shift toward autonomous driving that started about five years ago. Suppliers need the know-how to help cars see their environment much as a human pilot would, which means sensors, cameras and radar, plus the computing power to comprehend the waves of data and share some of it, like traffic conditions, from vehicle to vehicle. Meanwhile, parts makers are getting cheaper, with economic uncertainty and Brexit concerns driving share prices down.
“Automotive bankers are definitely spending more time in places like Silicon Valley,” said Christian Kames, Citigroup Inc.’s head of investment banking for Germany, Austria and Switzerland, and the global co-head of automotive. “The focus areas are electronics, communications and software. In the past, most suppliers didn’t really have that kind of technology, but they now know they need to have it to set the industry standards for the future.”

INFOTAINMENT NEXT
Up next could be deals in infotainment, which would give parts makers access to the all-important interface between driver and vehicle. With a number of smaller players, the sector is attractive because combinations probably wouldn’t raise the concern of competition regulators, said Chris McNally, a London-based analyst at Evercore ISI. Companies that could be bought either wholly or partially include Harman International Industries Inc., Visteon Corp. and Delphi Automotive Plc, he said.
“I think we’ll probably see a few more interesting deals over the next year or so,” McNally said. ZF Friedrichshafen AG, Continental AG and Robert Bosch GmbH have relatively little exposure to infotainment, he said. Last week’s slate of deals show where the industry is headed. ZF, fresh off last year’s $12.9 billion purchase of TRW, the industry’s biggest in eight years, took a 40 percent stake in radar supplier Ibeo Automotive Systems GmbH and bid 4.41 billion kronor ($515 million) on Aug. 4 to win brake-maker Haldex AB away from German competitor SAF-Holland SA. The day before, Samsung Electronics Co. was said to be in advanced talks to buy some or all of auto-parts maker Magneti Marelli from Fiat Chrysler Automobiles NV in a potential $3 billion deal. If successful, it would be Samsung’s first automotive purchase.
“If you don’t buy now, and boost your capabilities for autonomous driving and for connected cars, there’s no second chance,” said Dietmar Ostermann, who leads an annual study of supplier deals as director of the automotive practice at PWC. “Because the others will.”
Deals involving makers of powertrain and chassis components remain the most common, he said, but electronics-related acquisitions are the growing the fastest.
The shift toward electric vehicles will also drive deals, especially as industry leaders announce ambitious targets, said Axel Hoefer, a managing director at Goldman Sachs Group Inc. in Frankfurt. Volkswagen AG Chief Executive Officer Matthias Mueller is aiming for as much as one-quarter of its global sales to be battery-powered vehicles by 2025.
“Put yourself in the shoes of a traditional supplier,” Hoefer said. “A gradual shift is fine. But if it’s a steep change, that will put lots of people under pressure.” In addition to the rush to acquire technology, increased appetite from China is driving deals, according to bankers. For example, Ningbo Joyson Electronic Corp., a Chinese supplier to several of the world’s largest automakers, agreed in February to buy U.S. air bag maker Key Safety Systems for $920 million.