July 2, 2015 — In this report The Banks Report analyzes the financials of Cox’s pending acquisition of Dealertrack; why the deal makes sense; and its effect on the industry and other companies.
Cox Automotive’s pending acquisition of Dealertrack is big on several levels. Not only is the $4 billion deal the biggest acquisition financially among dealership technology vendors, it likely will force other companies to make moves they may otherwise have passed on.
While the announcement two weeks ago surprised the industry, the deal has been percolating for some time. Serious discussions about an acquisition between the two companies began not long after the NADA convention in late January. (TBR broached the possibility with both Dealertrack executives and Cox Automotive executives last fall. The response we received was less than positive — mainly because of what it would take to get a deal of that size done.)
Others were seeing the possibility of a deal. At the Automotive News conference just prior to NADA in San Francisco, an audience member asked Cox Automotive’s President Sandy Schwartz whether the company was in the market for a DMS (dealer management system). His response was no, saying he believed the DMS market was ripe for disruption.
Cox’s initial offer was turned down. The gap between what Cox offered and what Dealertrack was sizeable, according to our sources. But it began to narrow as discussions continued off and on over the next few months.
Dealertrack shareholders are receiving a premium of about 59%. The stock was trading at about $39 a share on Friday June 12 and jumped to more than $62 on Monday June 15 when it was announced Cox was going to pay $63.25 a share to acquire Dealertrack — not a bad weekend.
Total value of the deal once it closes will be about $4 billion. While it may appear that Cox overpaid for Dealertrack — a company that was generating just over $1 billion in revenue with a $2.4 billion market cap — it was the right price. Anything lower probably would have forced Dealertrack’s board to shop it to other potential buyers.
Why the Deal Makes Sense
First, why does Dealertrack make this deal? Obviously, it was a great price and represents a strong return for investors.
Meanwhile, the timing was right even though chairman Mark O’Neil wasn’t looking to sell the company. But he and the management team were starting to come under pressure for what many investors felt was a lackluster stock price.
It broke $50 a share following its $987 million purchase in early 2014 of website provider Dealer.com. But it then slid back into the high $30’s and occasionally flirted with $41 – $42 a share.
Dealertrack had made numerous acquisitions through the years, including the $195 million acquisition of global DMS vendor incadea in January.
Investors wanted to see a bigger return on those purchases. O’Neil spent a lot of time on the earnings calls trying to manage expectations saying the returns would begin happening in 2016.
He probably had a year before investors really began exerting pressure.
The bigger question is, why does Cox Automotive make the purchase?
The truth is, there is very little product overlap with the two companies. What Dealertrack is strong in, Cox is weak. And where Cox is strong, Dealertrack was weak. It is a brilliant move and positions Cox nicely to be the leading vendor in the space for the next several years.
The deal enhances Cox’s position in four areas.
First is the website business. Cox tried to develop a viable responsive website platform but could not get it done. Neither Haystak nor VinSolutions were able to make it happen.
And a viable website with significant market share is critical to Cox’s strategy of moving the industry closer to where online transactions is a reality. Dealer.com gives Cox what it needs to execute that vision.
The acquisition is also a data play. Being able to marry the data from its numerous sources such as Kelley Blue Book and Autotrader to the traffic flowing through the Dealer.com websites along with Dealertrack’s financing data from the credit applications it sends to the banks is a powerful capability. Add the Manheim used vehicle data and Cox is going to touch just about every part of the shopping and transaction process.
Third, Cox lands a viable DMS. It is old, has issues and probably needs to be rebuilt, but it is the fourth largest in market share and provides Cox with a serviceable solution to work with. It will be interesting to see whether Cox decides to make a significant investment in the DMS to make it more competitive with Reynolds and Reynolds or CDK. Or possibly, Cox will look at bringing incadea to the U.S.
Meanwhile, having a viable DMS with respectable market share will provide a measure of protection against the on again-off again data integration plays Reynolds and Reynolds and CDK are known for.
The fourth area is, it enhances Cox’s global presence with incadea, a DMS in numerous international markets. At least in China, where incadea recently won the Ford business, Cox adds another piece that might have some play with its BitAuto investment there. (Read our analysis of incadea: Dealertrack Announces incadea Acquisition.)
Finally, the deal will change the nature of the conversations Cox has with the automakers. Those conversations likely will be significantly enhanced in the next few months.
Even though there is little overlap of products, they do have competing inventory management products, which might prove to be an issue because, combined, they control much of the market share. Also, there is concern about how much data Cox will control once the acquisition is completed. Dealertrack provides a significant amount of data to other third party vendors at a reasonable cost.
We’re hearing rumblings the Department of Justice is looking into these areas. They won’t stop the deal, but they may place some requirements on Cox regarding the data. And it’s not far-fetched to see the DOJ require a solution or two be spun off due to monopoly concerns.
The Industry Effect
Make no mistake — this is a huge deal in the industry and sets Cox up potentially to be the power broker among the rest of the vendors.
Even with Dealertrack going to Cox, Reynolds and Reynolds and CDK still maintain their position. But if Cox makes one more acquisition (and it has to be the right one), it would become the top power player and will be able to dictate much of what happens in automotive retail the next several years.
Meanwhile, this deal may spur other deals to happen before the end of the year. It certainly has several companies evaluating their position in the market place.
We won’t disclose specifics, but there are numerous conversations going on now — and some are intriguing and could create surprising relationships.