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Auto Industry Rebalancing Act Has Execs Focused On Operating Cost Reductions, M&A Activity

Given that the number of automotive companies planning acquisitions greater than $1 billion has tripled in six months, EY predicts an increase in headline-generating, high-value strategic deals in the coming year.

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DETROIT — Despite continued economic and geopolitical shocks,
leading automotive companies are maintaining confidence in a real and
sustained economic recovery, according to EY’s ninth Automotive Capital
Confidence Barometer, which surveyed 143 automotive C-suite executives.
The report also shows that 45 percent of executives consider cost
reduction their primary operating focus and, as credit becomes more
available, will be engaging in large M&A deals.
 
The biannual
survey shows that positive sentiment with regard to corporate earnings,
stock market stability and equity valuations is driving confidence. The
relative consistency in executives’ overall confidence numbers — down
slightly from six months ago, but still up solidly from 12 months ago —
point to a positive outlook.
 
“Our latest Barometer for the
automotive industry shows the sector has embarked on a great rebalancing
act,” says Mark Short, leader, Global Automotive Transaction Advisory
Services for EY. “We’re seeing a renewed focus on optimizing capital
while taking advantage of favorable credit terms.”
 
Additional key findings from EY’s ninth Automotive Capital Confidence Barometer include:
· 71 percent expect to allocate the majority of acquisition capital to emerging markets.
· 89 percent believe the global economy as either stable or improving.
· 57 percent view capital optimizations as a key focus for the next 12 months.
· 54 percent point toward political instability or quantitative easing as the greatest business risk.
 
Automotive
respondents continue to focus on developing new products through
advancements in technology, increasing R&D spends and investing in
new geographies. Savings from cost reduction programs are fueling these
investments, leaving capital available to make incremental transactional
investments as opportunities arise, according to EY.
 
Job
creation expectations have decreased across the majority of sectors, and
in the automotive industry, plans to add to the workforce have dropped
significantly, from 59 percent expecting to create jobs in October 2013
to 38 percent in April 2014.
 
“Automotive companies’ reluctance
to invest in jobs may reflect longer-term structural changes in the
workforce,” added Short. “The digital transformation is making many jobs
obsolete, while at the same time creating new ones.”
 
Mergers and Acquisitions
Increasing
deal value could be the M&A story of the next 12 months. Automotive
companies’ intentions to engage in larger deals (greater than $500
million) over the next year have increased from a total of 14 percent
last April to 19 percent in this Barometer.
 
Of the 143
automotive executives surveyed, 58 percent view the global economy as
improving and 61 percent have confidence in corporate earnings, the
highest level in five years. These trends — along with 88 percent of
respondents seeing credit availability as either stable or improving —
should help drive automotive mergers and acquisitions.
 
Given
that the number of automotive companies planning acquisitions greater
than $1 billion has tripled in six months, EY predicts an increase in
headline-generating, high-value strategic deals in the coming year. This
shift toward larger deals has resulted in a more even distribution of
expected deal sizes.
 
“We see capital raising, principally in the
form of new debt financing, becoming a focus as executives take
advantage of the availability of credit at favorable terms,” said Short.
“We believe these trends are preparing the automotive sector for
significant transaction activity in the near future.”
 
For more information on EY’s Automotive Capital Confidence Barometer, visit www.ey.com/automotive or follow EY on Twitter at www.twitter.com/EY_Automotive.
 

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