This week, we introduce the newest contributor to our guest commentary series. Over the coming weeks, Richard Schwartz, managing partner at Schwartz Advisors, will present us with his take on the changes taking place in the industry. Today, he kicks off the series with a look at factors influencing mergers and acquisitions (M&A) in the aftermarket today.

By Richard Schwartz

Welcome to the first article in a monthly series from Schwartz Advisors

on issues affecting the automotive aftermarket. Our team includes a number of people with a great deal of experience in many different aspects of the aftermarket. During the next several months, we will share our thoughts about a variety of issues and challenges facing the industry. We welcome your feedback and comments.

Since one of the areas where Schwartz Advisors has a lot of experience is mergers and acquisitions (M&A), we receive many questions about the current status of M&A activity in the aftermarket. Last year was very active for M&A as many companies took advantage of lower tax rates and were sold. We think 2013 will again be a good year for M&A in the aftermarket. Why?

Let’s start by looking back at 2012. There were 136 M&A deals that closed in 2012. Approximately 70 percent of the deals had a transaction value of $250 million or less, according to BB&T Capital Markets, one of the leading investment banks specializing in the automotive aftermarket. While there were 20 platform acquisitions made by private equity investors in 2012, most of the M&A activity last year was conducted by strategic buyers. A platform acquisition is a new investment for a private equity firm. Many existing companies completed what are called “tuck in” acquisitions, or the acquisition of a company that is merged into a division of the acquiring company. 

This year, M&A activity in the automotive aftermarket will be driven by favorable industry factors that attract interest from both private equity and strategic investors. Many aftermarket segments are outperforming the S&P 500, making the aftermarket an attractive industry in which to invest. Interest rates have remained low, which helps buyers obtain the financing required to make acquisitions. Other key drivers include continued growth in the light vehicle/auto fleet for the next few years to 247 million by 2015 as reported in the Automotive Aftermarket Industry Association (AAIA) 2013 Factbook, and an increase in the average age of vehicles on the road, which is now at an all-time high of 11.3 years according to Polk, a leading provider of automotive information and marketing solutions. 

In addition, less uncertainty in the U.S economy and predictable earnings from aftermarket companies will continue to be drivers for M&A activity this year.

We also expect more M&A activity in 2013 as aftermarket suppliers look to consolidate to reduce costs and gain market share. Which segments of the aftermarket are well positioned for M&A activity? The collision and professional installer segments will benefit from the increased age and size of the vehicle fleet. We also expect to see M&A activity in distribution and manufacturing segments of the aftermarket, which will be driven by opportunities to consolidate and gain efficiencies.

"Generally speaking, the M&A market as a whole has gotten off to a slow start in 2013 from a volume perspective. That said, the combination of available credit

and the cash burning holes in the pockets of both private equity and strategic buyers means there is plenty of demand. Whenever demand from buyers outweighs supply, valuations are going to go up and we are definitely seeing that today. Where do we see activity focusing in 2013/2014?  We still see plenty of consolidation in the traditional WD markets, collision repair, tire & service and performance," said Jonathan Carey, managing director, head of Automotive Aftermarket Group, BB&T Capital Markets Investment Banking.

All in all, our outlook for more M&A activity in 2013 is based on the positive trends in 2012, favorable industry and economic factors to date, and the benefits of consolidation, including the opportunity to reduce costs and gain market share.

Up next month: What strategic investors and private equity investors look for in an acquisition. Let us know if you have any comments or questions. We are interested in your feedback and can be reached at [email protected].

Richard Schwartz is managing partner for Schwartz Advisors, a mergers & acquisition adviser and consulting firm to companies in the automotive aftermarket. For information, visit www.schwartzadvisors.com, email i[email protected], or call (858) 768-2623.