🔩 Is Magna Overpaying To Acquire Veoneer?
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🔩 Magna: Magnanimous Or Strategic?
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Magna International (MGA), the automotive parts manufacturer, is acquiring American-Swedish company Veoneer (VNE) for $3.8B in cash. The company expects the acquisition to provide a much-needed fillip to its Advanced Driver Assistance Systems (ADAS) business. Investors are wondering whether a yet-to-be profitable company deserves an all-cash payment of this magnitude. (Tweet This)
Hands In Multiple Pots
Over 36K people lost their lives in crashes on US roadways in 2019 and the trend is only increasing. In order to mitigate such incidents, vehicle manufacturers are developing Advanced Driver Assistance Systems (ADAS) that will help reduce the numbers and severity of such accidents.
Magna, headquartered in Ontario, Canada, has operations in close to 30 countries across the globe. It is the largest original equipment manufacturer of automobile parts in North America. Its list of clients includes General Motors, Ford, BMW, Mercedes, and even India's Tata Motors.
Inevitably, all manufacturers up and down the automotive value chain are focusing on self-driving cars and Magna is no different. It had announced with a lot of fanfare, an eventually short-lived 22-month partnership in March 2018 with Uber's rival Lyft (LYFT), to develop self-driving kits.
The company also dipped its fingers into EVs by joining hands with China’s BAIC Group in June that year to develop the next-generation smart electric vehicles for Chinese customers. It’s evident Magna was looking for a way to establish itself as a leader in all things mobility.
Enter Swedish-headquartered Veoneer which was spun-off from Autoliv in June 2018. This de-merged entity designs, develops, and manufactures systems for ADAS, occupant protection, and automated driving. Magna found in Veoneer, an ideal provider of the very systems it had been struggling to build over the past many years.
Too Much Premium?
On Friday, Magna swooped in with an all-cash offer to purchase Veoneer that sent cheers through the ranks of the target’s shareholders. Veoneer is as yet unprofitable, and its shares were hovering right around the $20 mark for some time. Magna offered to acquire all outstanding shares of Veoneer for a 57% premium or $31.25. Veoneer’s shares jumped to $31.17 in response to this deal.
For the quarter ended June 2021, Veoneer reported sales of $398M and an operating loss of $92M (compared to $64M loss Y-o-Y). Still, Veoneer’s Active Safety business which houses its ADAS division saw a 2.5X revenue increase Y-o-Y and expects organic growth of 25% this year.
Magna is committed to building out its ADAS capabilities and believes Veoneer’s addition will complement its own efforts and deliver greater ADAS content per vehicle. Magna expects to realize cost synergies of nearly $100M per year by 2024. Veoneer will be folded into Magna's electronics operating unit. The deal is likely to close by the year-end.
All that said, shareholders of Magna though, are unsure what this actually means for the company. Has Magna moved too quickly? Has the company overpaid for the technology? Can it successfully integrate Veoneer to realize the gains it’s hoping to achieve?
With the global ADAS Market projected to grow at a CAGR of 7.4% to $28.6B by 2026, it’s clear Magna wants to be ready to ride the wave that’s no doubt coming. The question is at what cost?
Market Reaction
MGA ended at $80.93, down 4.75% while VNE ended at $31.17, up 56.4%.
Company Snapshot 📈
MGA $80.93 -4.04 (-4.75%)
Analyst Ratings (19 Analysts) BUY 79% HOLD 21% SELL 0%
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