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The 2023 outlook for autotech M&A activity

The outlook for automotive technology (autotech) mergers and acquisitions (M&A) should prove to be strong over the remainder of 2023 for a number of reasons. Let’s explore these below. 

Valuations Come Back To Earth

First up, company valuations are dramatically lower than they were at their peak. The SaaS Capital Index, which tracks the larger publicly listed software-as-a-service (SaaS) companies, is currently trading at 7.1x annualized-revenue-run-rate (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, maybe 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. 

Record Amounts of “Dry Powder”

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 (VC) and private equity (PE) 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.

Strategic Acquirers Substitute Acquisitions for Organic Innovation

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.

Private Equity Has Taken Liking to AutoTech

Finally, Private Equity (PE) 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” noted above, PE is sure to continue to opportunistically look at deals as AutoTech companies are raising money or looking to exit.

The Take-Away

Net-net, the trends above bode well for a healthy amount of M&A across the AutoTech space for the remainder of 2023. Let the deals begin. Happy hunting!

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Steve Greenfield
Steve Greenfield
Steve is the Founder and CEO of Automotive Ventures, an automotive technology advisory firm that helps entrepreneurs raise money and maximize the value of their companies. They also assist PE firms to conduct due diligence on automotive technology acquisitions, advise technology CEOs on strategy, and help represent sellers at the time of sale.

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