Global Capital Confidence Barometer: Automotive

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Global Capital Confidence Barometer, May 2016: Automotive | 14th edition

Innovation and alliances are driving automotive M&A

Our latest Global Capital Confidence Barometer continues to find a healthy appetite for acquisitions within the automotive sector, with more than half of survey respondents expecting to pursue acquisitions in the next 12 months.

Automotive companies have accepted the reality of an extended low-growth global economic environment — the vast majority of our respondents expect only modest or stable economic growth. Against that backdrop, our respondents indicate continued optimism about dealmaking.

Key findings

EY - Key findings

A shift to more stable deal characteristics is a strong indication of the sustainability of the current deal market. This stability has contributed to companies becoming more comfortable with doing larger deals, a trend demonstrated by the increasing deal intentions toward the upper-middle-market range.

Larger deals — those in excess of US$250m — make up nearly 60% of planned transactions in the next 12 months, according to our automotive executives.

Changes in the way companies interact with customers — increasingly through digital channels, the rapid acceleration of vehicle technologies and the growth of alternative mobility solutions, such as car- and ride-sharing, has automotive companies planning for multiple possible futures. Acquisitions continue to be an important option to transforming business and achieving growth.

However, M&A is not the only means to acquire innovation. Alliances are becoming an attractive option to securing access to cutting-edge technologies, enhancing R&D capabilities and managing cost and risk. One-third of automotive executives tell us they intend to enter alliances to accelerate both top- and bottom-line growth and generate monetizing opportunities with underutilized assets.

Automotive companies that successfully balance their M&A plans with strategic and innovative alliances will be well positioned to respond to the challenges of the marketplace and win in the evolving mobility ecosystem.

Macroeconomic environment: Automotive companies have accepted the reality of prolonged, low-growth economic environment and are looking to identify new avenues for growth and to protect earnings. Acquisitions will continue to be part of the growth road map.

Corporate strategy: Heightened global and regional political instability, especially in the Middle East, the Korean Peninsula and the South China Sea, are seen as key risks to many businesses.

In addition, volatility in commodity and currency markets, which began in earnest in 2014, is now entering its third year. While the impact has been positive in certain sectors and geographies, prolonged volatility may hamper companies’ ability to plan over the short to medium term.

Alliances: A growing number of automotive companies are evaluating or implementing new business models, in search of new sources of revenue and earnings amid a fast-changing mobility ecosystem. Alliances — in addition to and sometimes in place of acquisitions — are becoming more attractive as growth vehicles.

M&A outlook: While deal intentions have tapered from the strong figures of 2015, they have largely held up well above the long-term Barometer average. More than half of our automotive respondents (52%) plan to pursue an acquisition in the next 12 months.

Executives are using deals to generate their own tailwinds. They recognize the need to respond positively to disruption and complexity. Within the automotive sector, where the rate of innovation is accelerating and barriers to entry are being eroded, buying rather than building innovation may well be a better and faster option.

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