Auto Parts Industry Looks for New Deals
Auto parts makers, flush with cash and bolstered by U.S. sales running at more than a decade-high, are preparing to crank up
their merger and acquisitions activity to advance their technology offerings.
Nearly 60% of automotive executives who responded to a new Ernst & Young survey said they would pursue an acquisition over
the next 12 months, a development that could reverse a recent wave of share buybacks. Deal targets are those outside the
“traditional boundaries” of the automotive supply chain, suggesting a move to software companies.
Executives haven’t been as ready to make purchases since the parts industry was severely depressed in 2009, according to the
firm. At the time, a raft of bankruptcies and a U.S. auto sales slump drove down the value of firms with specialized manufacturing
or close ties with certain auto makers.
Suppliers today are generating more cash and are interested in acquiring firms that have components for autonomous cars and
vehicle-connectivity needs. Executives have said these deals are expensive, but more are willing to spend big to avoid being left
“Many of the companies now in this sector have to bring in different technologies and people to compete,” said Mark Short, E&Y’s
global automotive and transportation industry leader. Mr. Short surveyed more than 100 auto executives for the study.
Global mergers and acquisitions in the auto-parts industry slipped this year, to about $5.1 billion through December 14th, from
$6.7 billion in all of 2014, said deal tracker Dealogic. Activity is picking up: On Monday, French parts maker Plastic Omnium said
it is buying Faurecia’s automotive exteriors business for an undisclosed amount; units of India’s Mahindra Group agreed to buy
76% of Italian car designer Pininfarina for about $58 million excluding debt.
Lear, a seat and electronics maker, said in November it would purchase Troy, Michigan-based Arada Systems, which specializes
in vehicle-to-vehicle and vehicle-to-infrastructure communications, for an undisclosed amount. The deal allows Lear to venture
into communication outside the vehicle.
Delphi Automotive, which produces a variety of automotive electronics, earlier said it bought Ottomatika. Delphi intends to use
Ottomatika’s software to make its safety components smarter so they can help a driver avoid a crash or respond faster in the
moments before a collision.
On Monday, Susquehanna analyst Matthew Stover raised the
question of whether the industry might see another multibilliondollar merger like ZF Friedrichshafen purchase of giant TRW
Automotive Holdings, which closed earlier this year. One target
could be turbocharger maker BorgWarner given its depressed
share price, he said.
Many auto parts makers have been funneling their extra cash into
share buybacks. Delphi Automotive, Lear, BorgWarner,
Tenneco, Cooper Tire & Rubber have collectively spent more than
$6 billion since 2012 on share buyback programs.
Last week, Visteon, a maker of car electronics, said it would pay a
$1.75 billion special dividend to shareholders and repurchase up
to $500 million in its shares through 2016.
Lear Chief Executive Matt Simoncini said suppliers have needed to
balance a variety of demands on resources. The company has had more than enough money to fund research and development
and make acquisitions.
“But we aren’t going to just go out and buy a company if the price isn’t right,” Mr. Simoncini said. “When we don’t have alternative
ways to use this cash, we think the best move is to invest in Lear stock.”
Lear has spent $2.3 billion since 2011 buying back one-third of its shares outstanding. Like many of its competitors, the Michigan
supplier spent between 5% and 10% of revenue on R&D.
Dan Hearsch, an AlixPartners director, said companies reach a point of diminished returns when it comes to investing in research
“Just throwing more money at it doesn’t mean you will get the advancements,” he said. “These companies are looking at what
they need. Sometimes it doesn’t make sense to be the first especially when they can choose to partner up or purchase another
company to get what the need.”
Robert W. Baird & Company analyst David Leiker views buybacks “as a positive, especially for the auto suppliers since it is not
only allowing them to return cash to shareholders, but as a byproduct it is accelerating earnings per share growth.
He points to Delphi’s recent third quarter results. Earnings per share rose 13% year-over-year which was almost twice as fast as
net income which rose 7% Delphi also had $434 million worth of cash on hand year-to-date through the end of September.
OP EX APPLICATION: Explore the auto parts industry’s current focus of expanding its production capabilities and technologies
through vertical integration. The assignment is to research and analyze this strategy considering …
When should a producer partner with another company to obtain new or improved capabilities rather than develop these
capabilities on its own?
Why are Tier-1 auto parts suppliers considering mergers and acquisitions and what are the benefits and risks of this action?
When merging with or acquiring another business, in your opinion, what are the critical areas of leadership that must be
employed to ensure the ongoing success of the transaction and why?
Please note that the MAXIMUM word count is 1,500 excluding charts and graphs.
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction
of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice.
Unethical use is strictly forbidden.
When should a producer partner with another company to obtain new or improved capabilities rather than develop these capabilities on its own?
Producers decide to partner with another company in the cases when one has assets that would improve on another’s capabilities. The cases in which a strategic partnership is a viable and good option for a producer are when the partner company can provide higher efficiency, quality and/or technological capabilities in the areas of manufacturing, engineering or product development. Producers strive towards exploring the potential of partnership and teamwork in order to overcome the limitations of recourses and competencies in order to increase flexibility and leverage their own capabilities, while sharing the costs and risks that arise....