Activist Investors & Automotive Suppliers

Considering the many variables affecting the landscape of the automotive supply chain, investor activists see a great deal of opportunity right now.

It is no secret that Wall Street has downgraded the outlooks for major automotive suppliers at regular intervals over the past few years, as widespread disruption in the industry has caused stock analysts to reconsider the long-term viability of many traditional powertrain businesses.

Suppliers who are primarily invested in the traditional powertrain face a quickly evolving landscape, with pressure from global legislation shifts, changes in market opinion, and the rise of new technologies that will be eventually making internal combustion engine (ICE) components obsolete.

The uncertain, often unplanned-for nature of this new landscape is creating the perfect environment for investor activists to win—if companies do not start to clarify and better communicate their strategic direction.

As disruption creates new product and business model opportunities, strategic-thinking suppliers will continue to refocus their product portfolios away from some of their traditional mechanical products and toward expanding their electronic/electrical offering to position themselves for the new future.

Other suppliers will follow the lead of suppliers such as Delphi, Continental and Autoliv, which have announced or completed spin-offs, due to:

  • The differing pace of technology advancement in their different business segments, such as Delphi’s powertrain business versus the autonomous vehicle technology which eventually became Aptiv
  • Different market needs driving investments for growth and innovation
  • Different skill sets of people throughout the organizations (leadership, engineering, sales, purchasing, supply chain and manufacturing)
  • Different sales growth rates over the near- and long-term with limited customer or operational synergies
  • A potentially different shareholder profile due to the timing of returns.

Publicly traded suppliers that are not already making strategic decisions – including most of the top 100 auto suppliers – will undoubtedly face increased pressure from activist investors who seek to unlock value and raise stock valuations. If these suppliers delay the inevitable, they will only limit the number of options they will have to succeed in the coming world of electrification, connected cars, and autonomy.

For example, earlier this year, GKN (gkn.com) went through a very public proxy battle which management eventually lost. At the core of this fight was this issue: what is the best way to unlock shareholder value in this new, disruptive environment?  GKN management’s original intention was to sell off the Driveline and Powder Metals businesses.  This would leave, at the core of the GKN holdings, the Aerospace business that was valued at much higher multiples and was preferred by shareholders for both financial and strategic reasons.

While GKN initially announced a deal to sell off the Driveline business to Dana, it was eventually stopped when private equity firm Melrose won the legal fight to take GKN private.

In the end, however, Melrose’s strategy will likely be very similar to that of previous GKN management, because in this current market environment there are few strategic options.  You shouldn’t be surprised if GKN Driveline ends up with Dana someday in the near future.

Expect to see more of this activity, especially for industrial businesses like GKN that maintain a mix of traditional automotive businesses tied to the ICE and non-automotive businesses that carry very different shareholder values.

For example, consider Textron (textron.com). Today Textron is an industrial conglomerate with a diverse portfolio of businesses that range from aviation to military to EZ-Go golf carts to Arctic Cat snowmobiles. Its portfolio also includes automotive businesses tied to the imperiled traditional internal combustion engine ecosystem, including fuel tanks, engine camshafts, and crankshafts.  

In the end, activist investors may believe that this automotive business creates significant earnings headwind for the company. And they could push management to act — to sell or spin-off the business. 

Considering the many variables affecting the landscape of the automotive supply chain, investor activists see a great deal of opportunity right now.

Traditional suppliers span a wide range in readiness: from those who are already deploying consolidation strategies to those who are continuing to operate with their sole focus on the internal combustion engine. Along this spectrum, there are many ways for investor activists to identify clear wins and opportunities to make an incredible impact.

Overall, the automotive supply chain will see more challenge and change this year and next than the industry has witnessed in the previous 50 years. And if investors want to capitalize on it, they see that now is the time to act.