Auto suppliers top $10 billion with first half merger activities

TRAVERSE CITY, Mich.— Seemingly unworried about wobbly global markets, automotive suppliers are wheeling and dealing to acquire each other or dump underperforming assets.

Spending appears to be down from a year ago, but the numbers are deceiving.

In the first six months of 2016, buyers closed 85 deals to acquire automotive suppliers, up from 84 deals a year earlier, according to PricewaterhouseCoopers.

But the value of supplier M&A deals in the first half totaled $10.1 billion, just more than half of the $20.0 billion spent a year earlier.

That would be the first time that the value of supplier acquisitions has declined since 2010, according to PwC. But that's because last year's dollar figures were inflated by a single giant deal—ZF Friedrichshafen's $12.5 billion acquisition of TRW Automotive Holdings Corp., said Jeff Zaleski, PwC's U.S. automotive deals leader.

“We're off from a record high in 2015, but the market continues to be strong,” Zaleski said. “We think we'll have a positive M&A market in the next six months.”

Deal-making should be lively because suppliers have cash and investors are pressuring companies to dump noncore assets, Zaleski said. Europe, recovering slowly from its deep recession, should be a fertile market for M&A activity, he added.

“There is still a lot of consolidation to be done” in Europe, Zaleski said.

Fast-paced advances in self-driving cars, connectivity and fuel economy will keep the heat on suppliers to make deals, predicts Mark Wakefield, a managing director at AlixPartners.

Suppliers in these segments can develop their own technology, find a partner or buy another company. Likewise, these companies must be prepared to dump divisions that are also-rans in their segments. Standing pat is not a good option.

“Being one, two or three in a given segment is very important,” Wakefield said this month during the Center for Automotive Research's Management Briefing Seminars here. “It gets very hard to lead a segment, since you are going up against companies with mountains of cash.”

According to Wakefield, a good example of a company trying to reinvent itself is Magna International Inc. In recent years, the Canadian supplier has worked to reposition itself through acquisitions, investments and sales.

In January, Magna completed the $1.9 billion acquisition of transmission maker Getrag, a deal that gave it expertise in fuel economy. In April, Magna followed up with the purchase of Telemotive A.G., an engineering company with expertise in driver assistance and vehicle diagnostics.

These two deals followed the sale last year of Magna's interiors unit to Spanish supplier Grupo Antolin for $525 million—a deal that allowed Magna to exit a cutthroat segment where profits are elusive.

Said Wakefield approvingly: “They've been very disciplined about buying and selling.”

Like Zaleski, Wakefield expects a strong M&A market in the second half of the year. Aside from fast-changing technology, Wakefield expects China's auto market to continue to expand.

Suppliers can't afford to sit on the sidelines, he said. “The successful suppliers aren't just profitable—yhey're growing faster, too. The adage ‘grow or die' does become true.”