Automotive M&A : Value creators vs. value destroyers

Success of automotive M&A still rides on integration

Joanne Heng

Joanne Heng

Principal, Deal Advisory and Strategy, KPMG US

+1 213-593-6663

Lenny LaRocca

Lenny LaRocca

Partner, Financial Due Diligence, KPMG US

+1 313-230-3280

Todd Dubner

Todd Dubner

Principal, Strategy, KPMG US

+1 212-954-7359

Matthew Dintelman

Matthew Dintelman

Managing Director, Deal Advisory and Strategy, KPMG US

+1 312-320-0014

The automotive M&A market is leaving COVID-19 behind and jump starting again. As they look to the future, all the talk among industry players is on how best to seize opportunities in a changing landscape of electric, connected and autonomous vehicles (For more on this transition, see Place your billion-dollar bets wisely: Powertrain strategies for the post-ICE automotive industry). But as in the past, the success of any future deals will depend on carefully planned integration.

According to a recent survey of 50 automotive executives we conducted for a new KPMG report, Capturing value in automotive M&A, the biggest reasons why deals fail is poor execution. This in turn triggers customer defections, plant disruption, organizational confusion and employee turnover. In contrast, survey respondents said the leading contributor to value comes from optimizing marketing, sales and distribution involving both revenue improvement and margin enhancement through the rigor of integration planning and execution.

Value creators

In marketing, sales and distribution, one of the most common integration tactics for revenue improvement is cross-selling, such as increasing content per vehicle (CPV) through cross-selling on core vehicle platforms. Cross-selling can be especially accretive when the buyer and target have complementary or adjacent product lines. To plan for cross-selling, begin with an analysis of customer overlap—looking at clients, programs and commodity. Savvy executives will weigh these three elements to realign sales teams, and their incentives, to go after the greatest areas of opportunity in the combined customer base.

Methods for improving margins vary depending on the assets acquired and the market. Key factors include the location of plants, overlap in shipping routes and potential to source lower-cost materials. Lowering the cost of goods sold to improve margin can take different forms depending on the environment. When material costs are high, see if a newly acquired plant may be able to produce an input for a plant in the buyer’s network at a lower cost. Such opportunities for lowering input cost are especially effective when replacing a plant input from an external supplier, thanks to higher network utilization.

Value destroyers

While optimization of marketing, sales and distribution ranked as the driver of greatest value, it is also one of the riskiest areas to successfully integrate. To minimize confusion and reduce the risk of customer losses, companies should plan for minimal change in customer-facing activities in the first 30 days. They should consider deferring these initiatives through phased steps culminating in a “customer” Day 1, when the most sensitive changes start to become effective. This allows time to stabilize relationships with key accounts and to better prepare changes that will affect the customer experience, such as changes in payment terms.

Some of the most common disruptions to customers in an integration include changes to payment terms and contractual agreements, and changing customer contacts due to organizational realignment—combining and resizing the sales staff or reallocating accounts.

Seven steps to a winning integration

Against this backdrop of integration opportunities and risks, here are seven steps companies can take to maximize their odds that M&A deals will deliver the intended results:

  1. Commit the C-suite to support middle management on the day-to-day integration effort.
  2. Start integration planning during due diligence to minimize disruption on Day 1.
  3. Identify, quantify and design synergy plans in detail and make them time-bound and owner-driven with transparent results.
  4. When purchasing a carved-out business from a seller with minimal support infrastructure (e.g. minimal IT, HR, finance), buy stability and time with transition services.
  5. Consider the impact to temporary/outsourced spend and overtime before pulling the lever on personnel synergies—i.e. seal the perimeter to avoid shifting costs.
  6. Minimize changes during the first 30 days in critical functions such as IT, HR, operations and finance.
  7. Reassess synergy opportunities after close to uncover additional value opportunities, but from bottom-up.

Learn more by downloading and reading our full report.