October 4, 2018 Legal Executive Institute Automotive Conference
EVs in Global Fleet (in millions) Gigawatt-hours Demand (GWh) Trillions of Passenger Miles (US) Changing State of Automotive M&A Manufacturers, equity/venture funds and technology companies continue to invest heavily in automotive technology, bringing with it changes to business models and product offerings. Investments are being made in ride sharing/mobility, autonomous vehicles, online vehicle dealerships/trading platforms and other technological vehicle features. 2017 Auto-Tech Deal Volume 2017 Auto-Tech Deal Volume by Sub-Category 6% Non-tech acquiring tech 11% 3% Alternative powertrains Connected car Tech acquiring tech 8% 42% Autonomous vehicles 41% 53% 11% Online dealerships/trading Tech acquiring non-tech Ride sharing 25% Other Global Electric Vehicle Fleet & Demand for Battery Capacity Speed of Ride Sharing Adoption in the U.S. 140 120 100 80 60 40 20 0 127 105 87 60 73 50 40 32 4 6 9 13 18 25 2017 2019P 2021P 2023P 2025P 2027P 2029P 1000 800 600 400 200 0 7 6 5 4 3 2 1 0 2017 2019P 2021P 2023P 2025P 2027P 2029P Global Fleet of Electric Vehicles gigawatt-hours (GWh) Individual Ownership Miles Ride Sharing Miles Sources: Rethinking Transportation 2020-2023 RethinkX Thomson Reuters, Bloomberg, Capital IQ and other publicly available sources
2 105 45 18 65 34 61 50 309 118 150 344 242 197 898 785 1,200 5,000 The Growth of Auto-Tech Auto-Tech Key M&A Figures 44 Transactions in 1H-2018 15.2x Median EV / EBITDA 3.0x Median EV / Revenue 191 Active Acquirers in Past 30 Months Private Investment in Connected and Autonomous Vehicle Companies (in $mils) Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Source: Thomson Reuters, Bloomberg, Capital IQ and other publicly available sources
Strategic Investment / Corporate Venture Capital Strategic investors are increasingly active in early stage venture investing opportunities 75 of the Fortune 100 are active in corporate venturing 41 have a dedicated corporate venture capital ( CVC ) team From 2011 to 2016, the number of CVC funds has tripled to 965 CVCs were involved in 25%+ of all global deals to VC-backed companies in FY17 From 2010 2017, Corporates have been active across various industries GE has made 202 investments, 220 for Comcast Ventures, 117 for J & J, 60 for BP Ventures and 58 for Unilever Ventures Other CVC making at least 20 early stage investments include American Express, General Motors, Monsanto, Shell and Time Warner Sources: Forbes: Corporate VC is on the Rise: Here s What to Know, February 14, 2017, Teddy Himler (https://www.forbes.com/sites/valleyvoices/2017/02/14/corporate-vc-on-the-rise/#6a223528bbf2) PwC / CB Insights MoneyTree Report Q4 2017 Pitchbook The Pulse of Private Equity. Is Corporate VC hurting PE? March 23, 2018. https://pitchbook.com/news/articles/is-corporate-vc-hurting-pe
Corporate Venture Capital Market at a Glance - 2017 https://medium.com/inv-global/corporate-venture-investment-hits-a-record-37-billion-in-2017-2837533b8b33
Auto Sector - Corporate Venture Capital Market at a Glance The Automotive Sector is at the center of much of this strategic investment. Leading corporate venture funds include: General Motors (GM Ventures) BMW (i Ventures) Toyota (Toyota AI Ventures) Renault-Nissan-Mitsubishi Joint Venture Volvo Car Group, Daimler AG have teamed up with Uber Volkswagen, Hyundai Motor have teamed up with Aurora The industry has seen sizeable rounds, for early stage companies including, for instance: ChargePoint, a provider of electric vehicle charging stations; StoreDot, a battery developer and Momentum.ai, an autonomous-driving startup Source: Fortune: Renault-Nissan-Mitsubishi Wants to Invest $1 Billion in Auto Tech Startup January 10, 2018, Bloomberg (http://fortune.com/2018/01/10/renault-nissan-mitsubishi-vc-fund-alliance-ventures-auto-tech-startups/)
Auto Sector - Corporate Venture Capital Market at a Glance https://techcrunch.com/2017/09/23/automakers-accelerate-their-interest-in-startups/
Corporate Venture Capital vs. Traditional Venture Capital CVC Advantages Marketing / R&D Cooperation Built-in Customer / Strategic Partner Built-in Distribution Channel More patient with capital / exit strategy More passive role in management CVC Disadvantages Perceived by potential targets as: Slower to make decisions Less educated in VC market, requiring more hand-holding More focused on own strategic objectives (and therefore less focused on target founders vision)
Legal Implications Understanding Next Steps The Strategic Rationale Why Does this Investment Make Sense? The Target Strategy The CVC Strategy The Financial Model The Long Term Business Plan Structuring How will we execute? Traditional M&A Joint Ventures and Strategic Relationships Seed Rounds - Direct Investment, Incubators and Accelerators Early Stage (Series A, B, C & D) Suite of Rights at Each Stage What matters Does the proposed structure support the overall business goals? Legal Terms Due Diligence (M&A or VC) Suite of Investment Documents Key Investor Protections Strategic Relationship Documents
Illustrative Example: ADAS and V2V Connectivity Multiple Levels of Integration Hardware Processor Sensors (LIDAR) Heads-Up Display (HUD) Software Control Apps Artificial intelligence System Integration CAN Post- Installation Updates
Common IP Issues for ADAS and Other Integrated Products Competitive Landscape Disruption IP Protection Mix IP Ownership from Joint Collaboration Patent Enforcement Entities Levy Tolls Obligation to Defend and Indemnify
Common IP Issues for ADAS/Other Integrated Products Landscape Traditional Auto Players Large Tech/Small Tech Entirely New Players Competitive Landscape Disruption: Each Has Own Vision and Experience in IP
Common IP Issues for ADAS/Other Integrated Products IP Ownership IP Ownership and Right to Use Freedom to Use Technology With other customers? Later Improvements by Collaborators Freedom to use? Retaining Background IP Share what you bring to the table? Conditions for enforcement Who needs to be involved?
What is CFIUS? The Committee on Foreign Investment in the United States ( CFIUS ) conducts national security reviews of foreign investments. Chaired by the U.S. Treasury Department, CFIUS comprises key federal agencies with international trade and national security functions.
Why does CFIUS matter? CFIUS can block or unwind cross-border mergers and acquisitions that threaten U.S. national security. Covered Transactions can include acquisitions, investments, mergers, and even some joint ventures. Foreign investments in a U.S.-incorporated entities. Foreign investments in foreign-incorporated entities with subsidiaries, operations, or assets located within the United States. Covered Transactions can also reach U.S. entities that have foreign ownership. Can include ownership by foreign entities (including Limited Partners) with indirect and/or passive ownership as small as 7 percent. CFIUS does not review U.S. investments in domestic or foreign companies. These outbound investments by U.S. companies may trigger other international trade and national security issues. (FCPA, OFAC, Export Controls, AML, etc.)
When does CFIUS apply? Buyer-Side Characteristics Investor Nationality: China is the top CFIUS enforcement priority, followed by Russia, India, and countries in the Greater Middle East. Government Ownership: Transactions involving Foreign Governments, State-Owned Enterprises, or Sovereign Wealth Funds attract greater scrutiny. Seller-Side Characteristics Security Clearances: Does the target have security clearances issued by the Defense Security Service ( DSS ) or other U.S. Government agencies? Defense Activities: Does the target work with defense-related activities controlled by the International Traffic in Arms Regulations ( ITAR )? Export Controls: Does the target make products, software, technology, or technical data controlled by the Export Administration Regulations ( EAR )? U.S. Government Contracts: Does the target have contracts, grants, or other commercial agreements with U.S. Government agencies? Critical Infrastructure: Does the target operate in the energy, telecommunications, transportation, or other sectors critical to U.S. Homeland Security?
How does FIRMMA change the CFIUS process? Substantive Changes Critical Infrastructure: Memorializes authorities over energy, communications, and other infrastructure that CFIUS was already exercising. Personal Privacy: Allows CFIUS to reach transactions involving sensitive personal information (e.g., financial, insurance, healthcare data, etc.). Real Estate: Requires CFIUS notices for certain real estate transactions with close proximity to U.S. Government facilities. Sensitive Technology: Strengthens review of technology transfers through joint ventures and other arrangements. Procedural Changes More Authority: Strengthens CFIUS s ability to self-initiate investigations into cross-border mergers and acquisitions. Less Discretion: Mandates Declarations for transactions where foreign governments or stateowned enterprises have a substantial interest. Higher Scrutiny: Requires parties to disclose side agreements and other detailed information regarding non-controlling, non-passive parties. Longer Proceedings: Increases the mandatory 30- day review to 45 days, and allows CFIUS to extend to the optional 45-day investigation to 60 days.
Conclusions Greater scrutiny demands a more proactive approach. Evaluating potential CFIUS requirements should become a routine part of the crossborder merger and acquisition process. Longer CFIUS review periods can impact deal timing. Addressing these issues up front can save time and cost while mitigating risk. Develop transaction-specific strategies. CFIUS cases are transaction-specific, not country-specific. Evaluate each transaction in its own right before deciding whether a CFIUS notice is appropriate. CFIUS is an advocacy process, not a regulatory filing. CFIUS cases are major undertakings that often involve direct advocacy with several government agencies. Plan ahead, get experienced help, and budget accordingly.