Current M&A Trends - Automotive
The M&A market, including in the automotive sector, was severely hit by the COVID-19 crisis. In an industry already in transformation pre-crisis, it is interesting to see how COVID-19 has changed automotive M&A deals and deal-making:
- Buyers have placed an increasing due diligence focus on assessing the medium and long term impacts of the COVID-19 crisis on the business plan and revenue situation of potential automotive targets. This includes for instance, examining a target’s operational resilience in a crisis, including the ability to maintain production and core administration functions despite a lockdown.
- It has become increasingly difficult to determine the valuation of a target. Historical financial information may not reflect disrupted supply chains, atypical stock levels and changing modalities concerning receivables and payables.
- When negotiating the transaction documentation, there is, not surprisingly, a recognisable trend of discussions around material adverse change (MAC) clauses. MAC events for automotive OEMs and suppliers can be manifold. Buyers usually have a strong interest to define MAC events as precise as possible (e.g. specific thresholds for declines in orders) while sellers may prefer vaguer and more general references to business anomalies allowing leeways.
- COVID-19 also has effects on W&I insurances: We are seeing several insurers excluding COVID-19 related losses in their policies.
- Furthermore, since the beginning of the pandemic, insurers have in general asked for significantly increased levels of due diligence by buyers. Not complying with such requests by the insurers may result in harmful exclusions in the insurance policy.
Parties are thus well advised to factor in additional time and effort in the road to the signing of an M&A deal these days.