Self-driving cars accelerate auto deals in Silicon Valley

Munich: 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, 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’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. Companies that could be bought either wholly or partially include Harman International Industries, Visteon Corp and Delphi Automotive, he said.
“I think we’ll probably see a few more interesting deals over the next year or so,” McNally said. ZF Friedrichshafen, Continental and Robert Bosch 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 and bid 4.41 billion kronor ($515 million) on August 4 to win brake-maker Haldex away from German competitor SAF-Holland. The day before, Samsung was said to be in advanced talks to buy some or all of auto-parts maker Magneti Marelli from Fiat Chrysler Automobiles in a potential $3 billion deal. If successful, it would be Samsung’s first automotive purchase.
Buy now
“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, director of the automotive practice at PWC. “Because the others will.”
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 in Frankfurt. Volkswagen 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.”
China rush
In addition to the rush to acquire technology, increased appetite from China is driving deals, according to bankers. For example, Ningbo Joyson Electronic, a Chinese supplier to several of the world’s largest automakers, agreed in February to buy United States air bag maker Key Safety Systems for $920 million.
“The targets for my clients sit, while the buyers for my clients are in China,” Hoefer said.
Autonomous functions will take a leap forward in the next few years. BMW is working with chipmaker Intel and camera-software company Mobileye to bring a car to the road by 2021 that can cruise highways autonomously. Volvo Car Group is promising the same.
Continental, Europe’s second-biggest car-parts supplier, is working on its own BMW-style cooperation. The industry’s profit expectations for shared self-driving cars have helped make ride-sharing provider Uber Technologies Inc., which is testing autonomous vehicles in Pittsburgh, the world’s most valuable startup, worth about $62 billion