M&A activity in the auto industry is currently higher than ever before, with manufacturers looking to take advantage of the electric vehicle (EV) revolution. This significant commercial development is something which both law firms and aspiring lawyers will need to be attuned to.
What is the EV revolution?
Electric vehicles are at the forefront of a global commitment to a Net Zero economy. In line with this collective effort, EV promises are the cornerstones of the Net Zero strategies of governments across the world. In the US, Biden’s US$1.9 trillion ‘Build Back Better’ Act, which passed the House of Representatives on 18th November 2021, involves significant revamped tax credits for EV automakers.
Similarly, the UK’s Net Zero Strategy, which was detailed on 20th October 2021, consists of huge boosts for EV adoption, including a further £620m allocated for EV grants, improved charging infrastructure, and a new zero-emission mandate for car manufacturers. EVs appear not only to be at the forefront of the minds of governments, but also consumers. In 2020, demand for EVs was up 43% over 2019, with global stock exceeding 10 million.
What does this mean for automotive M&A?
Pre-2021, the highest value year for automotive M&A was 2009, with US$71.1 billion worth of deals changing hands. However, in the first three quarters of 2021, US$123.5 billion worth of auto deals have already been made. Car manufacturers themselves are evidently striving to reach the great heights of Tesla, whose US$680 billion market cap is the highest of auto manufacturers globally. A pioneer in the EV space, its ‘Model Y’ has a commanding 32.9% market share.
Tesla’s only real current competition is General Motors (US$82 billion market cap) and Ford (US$57 billion). However, as alluded to previously, EV demand is on the cusp of a megatrend, with the International Energy Agency forecasting 145 million sales of vehicles by the year 2030. As a result, there is currently a global scramble to capitalise on this exponential EV growth, a trend characterised by the role of particular companies, SPACs, which are causing noticeable ripples in the current Tesla-dominated EV space.
The role of SPACs
Special purpose acquisition companies (SPACs), also known as ‘blank cheque companies’, are companies with no commercial operations, formed solely to raise capital through an initial public offering (IPO), in order to acquire or merge with an existing company. Their popularity has rapidly risen in recent years, especially in the US, and with recent European regulatory reform, the same can only be expected here too. The highest value auto deal of the first nine months of 2021 was the acquisition of Lucid, a Californian EV manufacturer, by Churchill Capital Corp IV, a SPAC, for US$28.5 billion. Another significant deal was SPAC Gores Guggenheim’s acquisition of Polestar, Swedish EV manufacturer, for US$20 billion. Indeed, there is a whole host of high-value SPAC transactions concerned with EV manufacturers, which can certainly be said to account principally for this year’s automotive M&A surge. Why, though, are such manufacturers so attractive to SPACs?
A large number of EV companies are still in the early, experimental stages of their development. Indeed, many are yet to be profitable. Accordingly, they are suitable and attractive for SPACs due to their ‘high risk, high reward’ opportunity for investment. There is a similar trend concerning deals in the domain of autonomous vehicles. The most recent quarter saw Faurecia’s US$8.4 billion purchase of German manufacturer Hella, resulting in the emergence of a top 10 global auto manufacturer. Hella’s advancements in autonomous driving systems, in unison with Faurecia’s heavy investment into EV technology, are hugely significant for the industry.
It will be interesting to see if in the coming months SPACs will enter the market of EV charging infrastructure companies. Improved charging accessibility is, in theory, the last piece in the puzzle for the real consumer EV boom. Anyone with an EV knows the pains of being perilously low on battery and getting to a charging point, only to see that it is either already in use or malfunctioning. In Northern Ireland, for example, a distinct weakness of charging infrastructure has in fact seen the EV trend curb, with drivers turning back to petrol due to network issues. This will ultimately mean that EV charging manufacturers will play an important role in the revolution, and it can only be expected that M&A in this domain will take off, particularly when SPACs get their hands on them.
How does this impact law firms?
The unprecedented demand, technological innovation, and a political and commercial fixation upon EVs brings with it many legal complexities. What the auto industry is witnessing is a dramatic upheaval of everything it has ever known, with simultaneous changes in the manufacturing, use, and disposal of EVs, as well as a swathe of new investment and commercial activity. As a result, law firms will play an essential role in the success of this activity, which will ultimately feed into the success of the EV revolution itself.
Global law firm DLA Piper is particularly acclimatised to the revolution with its Automated, Connected and Electric Car Group. The group is equipped with multidisciplinary legal services which allow it to successfully advise clients on the plethora of legal issues which arise in connection with the EV trend. For example, they recently advised a European automotive company on privacy and cybersecurity legal framework in the US, which involved the development of industry and governmental guidance and US compliant privacy notices, in addition to a privacy review of connected services and related data flows.
Corporate law firms that specialise in finance and M&A will also be increasingly preoccupied with SPAC transactions, particularly in Europe due to recent regulatory reform. Use of SPACs has stalled in Europe to date, struggling to match the success of the US market because of regulatory barriers. Now, SPACs will be increasingly prevalent, and law firms will have to deal with the complexities of this new reform.
While such reform is specifically designed to protect investors, SPAC M&A is intrinsically linked to client risk, and law firms will have to be attuned to draft contracts which fully protect their clients. Ultimately, though, law firms will have to be attentive to the constantly shifting and evolving governmental laws and regulations facilitating the EV revolution across the world.