Auto cos in India strike major M&A deals in COVID year, Auto News, ET Auto

New Delhi: The calendar year 2021 began with the official announcement of the long-awaited merger of the auto giants FCA and PSA to create the world’s fourth largest auto group Stellantis. The trend continued throughout the year with M&A deals happening every month. They culminated in December with the partnerships of Reliance BP Mobility and Mahindra Group, ZF and Rane Group, and TVS Motor Company and BMW Mottorad.

Despite the disruptions and challenges from the COVID-19 pandemic, the Indian automobile industry finalised key partnerships with electric vehicles and auto components as the pivotal themes in 2021. Industry watchers say that companies go for acquisitions not only to grow but also to transform their businesses. Most deals are to acquire technologies of the new age companies which the incumbents do not have.

Ashim Sharma, partner and group head – business performance improvement consulting, Nomura Research Institute, said, “The reasons for these mergers and acquisitions could be two-fold. First, some of them were available at better prices than normal. Second, this was a time of reflection for the companies, that they should be ready when the world opens up again to normalcy.”

He believes that even though the course of action could have been different if it was not a COVID year, no dramatic difference would have been observed in the numbers of M/A deals that took place in 2021.

According to a Bain & Company report, Covid-19 has accelerated the disruption across sectors and companies are responding by transforming their businesses through M&A and divestitures. The report titled ‘India M&A: Acquiring to transform’ takes into account the mergers and acquisitions across the sectors in India during 2021.

Several Indian conglomerates are taking note and overhauling their portfolios through M&A, betting on profit pools of the future such as digital, renewables, electric vehicles, consumer, and fintech. At the same time, they are pruning ownership in legacy assets, or in sub-scale positions which could be more valuable to another parent, it said. “The Mahindra Group has reshaped its portfolio and exited loss-making businesses, with multiple divestments including a potential divestment of its stake in SsangYong.”

Today’s CEOs face dual pressures of growth and disruption. But the good news for executives is that the fuel for growth is available in abundance. Cash reserves and foreign direct investment inflows are at their highest-ever levels, private equity (PE) dry powder is available, and interest rates are at a 10-year low. Armed with this capital, one of the ways companies are responding to these growth expectations is through acquisitions, the report said.

A recent PwC report noted that global M&A hit historical highs in 2021 with a total deal value of $136.6 billion — up 111% over 2020. While the onset of the pandemic significantly impacted deal value and volume in 2020, M&A activity recovered and accelerated with the deal numbers in 2021 up 19% to 971 with an average disclosed deal size of approximately USD 435 million.

The report titled ‘Automotive: Deals 2022 Outlook’ focuses on the global automotive industry.

Major M&A deals in automobile industry during the calendar year 2021:

Future prospects

Sharma said that 2021 saw most deals in EVs (charging infra, powertrain), connected vehicle space and other sophisticated technology like the electronic tech with safety systems, because a large part of this is not made in our country though regulations are making them necessary.

Going forward, companies are looking at acquiring technologies like battery tech and safety systems (eg autonomous emergency braking) to gain more control over supply chains. Software is also becoming important with the rise in connectivity, he said.

According to the Bain & Company report, digital and environmental, social, and governance (ESG) are long-term value creation hot spots over the next decade, with the increasing focus of major economies on achieving net zero emissions and the omnipresence of digital. ESG and digital-related deals can unlock significant value by driving a multiplier effect on valuations.

The PwC report also stated that deal activity in 2022 is likely to continue to expand as we experience greater access to emerging sources of capital (notably SPACs), investment in new energy vehicles (NEV) and technology across all automotive subsectors. Traditional trends in supplier and retail consolidation may continue, though with a focus on investments in technologies for future driving and new ways of engaging with customers whose habits of buying from traditional sources have changed.

The consultancy also expects M&A to be both a catalyst and opportunity for organisations to right-size operations to meet new market demands and strengthen supply chains in a post-pandemic world. Some vehicle manufacturers enter partnerships to combat shortages of key production inputs — mainly semiconductors — and expect others to follow suit as these challenges may persist well into the whole of 2022. “While we remain bullish, investors will need to be cognizant of navigating ever complicated geo-political uncertainties and regulators that are beginning to focus on net-zero emission policies, the PwC report said.