Acquisition Overview
Aptiv, a global technology company focused on automotive innovation, has announced that it will be acquiring Wind River, an edge software solutions developer, for $4.3bn in cash from TPG Capital, the private equity platform of alternative asset manager TPG. This is Aptiv’s largest deal to date, and firmly cements the company within the fast-growing automotive software industry. The strategic rationale for the deal rests on the driving factors of synergistic technologies, diversification of Aptiv’s revenue stream, and the opportunity for Wind River to scale up.
Deal Structure
Aptiv will finance the all-cash transaction through a combination of cash and debt. Aptiv
ended Q3 of 2021 with c. $2.8bn in cash and equivalents; this would imply up to $2.5bn of borrowing to fund the remainder of the purchase. The acquisition is expected to close mid-year 2022 and is subject to customary conditions, including receipt of applicable regulatory approvals. Wind River will continue to operate as a stand-alone business within Aptiv as part of the Advanced Safety & User Experience (AS&UX) segment. Goldman Sachs & Co. LLC is serving as exclusive financial advisor to Aptiv, while Morgan Stanley & Co. LLC is serving as the exclusive financial advisor to Wind River.
Aptiv Overview
Aptiv is a global automotive technology supplier based in Dublin, Ireland. Aptiv designs and manufactures vehicle components and provides active safety technology solutions to global vehicle markets. It aims to develop safer and green solutions for the future of mobility, accelerating the transition to software-defined electric vehicles. As of December 2020, Aptiv has two diversified business segments: "Signal and Power Solutions” which provides complete vehicle electrical systems, and "Advanced Safety and User Experience" which provides advanced software and sensing systems, computing platforms, advanced safety systems and automated driving, user experience and infotainment, as well as other vehicular electronic control.
Founded in: 1994
Number of employees: 180,000
EV: $36.90bn
LTM Revenue: $15.62bn
LTM EBITDA: $1.98bn
Market Cap: $35.76bn
Wind River Overview
Wind River is a global leader in edge computing software. Edge computing aims to bring computation and data storage closer to the sources of data to improve response times and save bandwidth. Wind River’s software is used on over two billion edge devices across more than 1,700 customers globally. Their software portfolio spans the aerospace and defence, telecommunications, industrial, and automotive markets. Wind River generated approximately $400 million in revenues in 2021. In 2008, Intel acquired Wind River for $884mn. Intel subsequently sold Wind River to TPG Capital in 2018 for an undisclosed amount.
Founded in: 1981
Number of employees: 1800
EV: N/A
LTM Revenue: N/A
LTM EBITDA: N/A
Market Cap: N/A
Industry insight
In the words of Kevin Clark, president, and CEO of Aptiv: “the automotive industry is
undergoing its largest transformation in over a century, as connected, software-defined
vehicles increasingly become critical elements of the broader intelligent ecosystem”. This quote sums up the radical innovation taking place within the automotive industry. The shift to a software-defined future of the automotive industry started in 2016, when Uber announced the $680mn acquisition of Otto, the self-driving trucking company, on the same day that it also unveiled a $300mn partnership with Volvo focused on vehicle development and production. In October of the same year, Tesla revealed that all its new vehicles would be equipped with hardware to enable fully autonomous functionality, and in December, Google disclosed that it was spinning out its self-driving unit into a separate company called Waymo. 2016 established that the future of mobility would be seamless, automated, and personalised. Fundamental to this transition is the development and integration of automotive software. Morgan Stanley estimates that the software and applications layers will collectively account for 60% of the value of a future self-driving car. Furthermore, the global automotive software market was valued at $18.5bn in 2019, and is projected to reach $43.5bn by 2027.
To capitalise on this requires innovative software development, seamless integration, and optimisation throughout a vehicle’s lifecycle. The automotive industry is quickly moving toward an era where cars will communicate with each other and to drivers - advancements in technology have challenged automotive makers to incorporate automotive software solutions to offer greater utility and convenience to their customers. Leveraging this opportunity presents a massive opportunity for long-term growth.
Strategic Rationale
There are three main factors driving this deal: the two companies’ synergistic technologies, the opportunity for Aptiv to diversify its revenue stream, and the scale benefits Wind River will gain from Aptiv’s global reach.
Firstly, Aptiv and Wind River both have decades of experience delivering software, and with their synergistic specialities of “Smart Vehicle Architecture” and intelligent edge software solutions, respectively, it makes strategic sense for the two companies to come together and create the software-defined future of the automotive industry. The deal provides an opportunity to combine Wind River’s industry-leading software, customer base and talent with Aptiv’s complementary technologies and global resources. As computation and processing continue to move closer to the edge, and connected devices, including vehicles, expand in complexity and capabilities, Aptiv can leverage Wind River’s leading edge computing software and capitalize on the auto safety megatrend to establish itself as a pioneer in this market.
Secondly, with only about 10% of Wind River's revenue currently derived from the
automotive segment, the acquisition will contribute to Aptiv's strategy of diversifying its
product portfolio into non-automotive segments. This means Aptiv will be better placed to weather market volatility, which is especially important in the already turbulent 2022 capital markets.
Finally, for Wind Rivers, the deal may strengthen and expand its competitive position in the multiple industries it serves. Wind River's generated revenue of $400mn in fiscal 2021 was derived mainly from Aerospace & Defence (c. 45% of revenue) and Industrial & Medical (c. 30%), with the Automotive contribution at c. 10%. While automotive accounts for a relatively small share of Wind River's current mix, this should change post-acquisition as its technology drives the expansion of Aptiv's software capabilities for smart connected vehicles.
Long-term prospects
While funding the deal could limit Aptiv’s balance sheet flexibility in the short run, the deal should yield an accretive outcome and Aptiv expects transaction synergies to exceed $125mn by the fourth year following the transaction close. Post-acquisition integration between the companies is likely to go smoothly, as Aptiv has a history of successfully integrating numerous acquisitions. There is also very little overlap between Aptiv's and Wind River's operations, which should limit antitrust concerns. Fitch expects risks from the Wind River acquisition to be limited, since Wind River is relatively small compared to Aptiv's existing business, with estimated 2021 revenue of only about $400mn, compared with Aptiv's estimated 2021 revenue of over $15 bn. Furthermore, Aptiv has a relatively strong long-term competitive position due to its focus on automotive technologies that are likely to grow in importance over the next decades as safety regulations continue to tighten, electronic components become more prevalent in vehicles, automated driving systems take hold, and consumer demand drives automotive manufacturers to offer increased in-vehicle communications and entertainment. Thus, this acquisition is likely to place Aptiv at the forefront of automotive software innovation, and as edge computing’s prevalence increases, Wind River’s software capacities can leverage this space in the market to create novel
services for customers, and long-term growth for shareholders.
Written by Kunal Barman (St Edmund Hall, University of Oxford)
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