Welcome to another edition of The Future of Automotive, with Steve Greenfield, Founder, and CEO of Automotive Ventures, where we put recent automotive and mobility news items into context, in terms of the broader thematic areas that will potentially impact the industry.
I’m glad that you could join us.
On this week’s episode, I want to provide an outlook for Automotive Technology mergers and acquisitions over the remainder of 2023.
In my line of work, I have the opportunity to speak weekly with dozens of early-stage companies and with strategic and financial investors. From my perspective, AutoTech M&A should prove to be strong over the remainder of 2023, for a number of reasons.
First up, company valuations are dramatically lower than they were at their peak. The SaaS Capital Index, that tracks the larger publicly listed software-as-a-service companies, is currently trading at 7.1x annualized-revenue-run-rate (or ARR), well down from its peak of 16.4x ARR back in late 2021. Private companies may need to face the reckoning that their valuations have been cut in more than half versus what they thought they were worth just two years ago.
Due to stock market volatility and higher interest rates, the IPO market has softened considerably. So late-stage companies that were planning to IPO are now on hold, waiting for the window to open on a more embracing climate for the public markets.
Because valuations are off so dramatically, companies may have a much harder time raising capital in this current environment. As a result, companies burning cash, that have no immediate path to profitability, may be in a “valuation trap,” unable to raise capital at a valuation that’s acceptable to current shareholders.
So, we may see a number of opportunistic acquisitions of companies that just can’t raise capital, and who instead are encouraged by shareholders to explore running a sales process to find an acquirer.
Second, there is a LOT of capital that needs to be deployed, capital that is currently waiting on the sidelines. Bain & Company’s Global Private Equity Report 2023 notes that there was $3.7 trillion in global private capital “dry powder” as of the end of 2022.
The way that venture capital and private equity works, fund managers have a strong incentive to deploy these funds into investments.
So, as these fund managers get confident that markets are stabilizing and returning to a more normalized environment, they will have trillions of dollars to deploy.
Third, strategic acquirers such as Reynolds & Reynolds, CDK Global, Cox Automotive and J.D. Power will continue to be acquisitive, sourcing new, innovative companies to round out their product sets, and cross-sell into their installed customer bases.
Once companies get to a certain scale, it’s easier for them to acquire proven innovations, rather than risking attempting starting and incubating new innovative concepts from within. If I’m a big strategic acquirer that already has thousands of dealerships as customers, a good strategy is to acquire hot, early-stage companies and simply let my salesforce get to work cross-selling the new products to my existing dealers.
Finally, Private Equity has grown to have a strong interest in the AutoTech space, having done very well with recent portfolio company performance. Coupled with the record amount of “Dry Powder” already discussed, PE is sure to continue to opportunistically look at deals as AutoTech companies are raising money or looking to exit.
Net-net, and considering everything that I’ve just said, the trends bode well for a healthy amount of M&A across the AutoTech space for the remainder of 2023.
I’ll be interested to see how the remainder of this year plays out, and you can be sure we will continue to track that activity here on The Future of Automotive on CBT News.
If you’re an AutoTech entrepreneur working on a solution that helps car dealerships, we want to hear from you. We are actively investing out of our new DealerFund.
If you’re a dealer who wants to invest in early-stage AutoTech companies that benefit your business, let me know. We are still accepting new investors into the DealerFund.
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And don’t forget to check out my book, The Future of Automotive Retail, on Amazon.com.
Thank you for tuning into CBT News for this week’s Future of Automotive segment, and we’ll see you next week!
