Why Tech Will Buy an Automaker

by Michael Keane

As the struggle and innovations continue to develop in the driverless car industry, the idea that a tech company will buy an automaker is becoming more and more real.  A few things come to mind in forming this idea. The first one that comes to mind is company valuation and cash balances. Many tech companies that are involved in the automotive space are sitting on a lot of cash.  The second area that indicates the probability of this idea is that there are already partnerships and smaller deals between the tech companies and the automotive companies. Another area that brings this idea to fruition is finding the answer to the question of “What does the future look like in the space and who is best capable to lead this move into the future.

If you look at the tech sector and the automotive sector in terms of valuation, you will see that it is entirely possible for a deal to happen. The following chart gives a quick snapshot of valuations of different tech companies involved in the auto space as well as a few automakers. You can see the cash balances and valuations of the tech companies actually put them in a favorable spot to make a bid. Tesla’s market cap and Ford’s is now basically equal.

Company	Valuation	Cash on Hand	Amount Invested in Auto
Alphabet	$600 Billion	$86 Billion	New Company named Waymo
Intel	$167 Billion	$5.5 Billion	Just made a bid for Mobileye
Apple	$753 Billion	$21 Billion	Undisclosed Amount in Software
Tesla	$45 Billion	$3.5 Billion	Full Electric Car Company
Ford	$47 Billion	$16 Billion	Auto Company
Fiat Chrysler	$21 Billion	$18 Billion	Auto Company
GM	$51 Billion	$14.5 Billion	Auto Company

Large partnerships are starting to abound between the two industries. Recently, Intel made a bid for Mobileye. Ford has been in partnerships with Alphabet. GM purchased Cruise Automation for more than $1 Billion dollars last year and has a partnership with Lyft. Mercedes Benz recently reached an agreement with Uber with regards to a driverless car. With all this smoke around, the likelihood of a purchase continues to get stronger and stronger.  

While in the past, someone might not associate tech with cars, today you just can’t get away from the connection. Driverless eco friendly vehicles are the future. Big companies are putting large fortunes in play to make this happens. There will be some hiccups and disasters for sure. But don’t be surprised if you wake up one morning, pick up your phone (instead of the tv), and find that a car company has been purchased by a tech company.

**Disclosure - KDK Fund, a client of KeaneVCC, owns shares of Ford. KDK Options, another client of KeaneVCC, owns an April spread options trade on Microsoft. **

Electric and Driverless Vehicles (pt.2)

by Michael Keane

Electric and Driverless Cars  Part 2

Electric Vehicles

In a previous post, a couple of large issues that the transportation industry was outlined. In this article, the focus will be on how the energy, insurance and governmental taxing agencies will handle the growing use of electric vehicles. Will energy companies be able to pivot off of its reliance on vehicle gasoline for profit? Will insurance companies be able to handle the likely decreased premiums due to vehicles no longer needing protection against gas related incidents? Will taxing authorities be able to pivot off of the taxes received from gas?

Energy companies are in a very precarious position. They are finding that there is a glut of fossil fuel energy while at the same time a lessening of demand for it. A big and growing culprit of this is the expansion of the electric vehicle. With non-fossil sources of fuel Companies like Tesla, GM, BMW, and others have put in large resources to build out these vehicles. as alternative fueling grows, so does demand for the vehicles. This increased demand is bringing costs down into an area where the masses are able to participate.  

One possible rock to lean on during this time is the time period just as the automobile was becoming more and more popular. Energy companies faced a similar threat to their business as electric lights replaced oil in homes. The question becomes what is the switch they need to make. The larger companies should be able to absorb some of the trouble. But overall, margins are going to get squeezed.

In terms of insurance, there is one item that I can think of that should lessen premiums. That item is the removal of gas and oil (extremely flammable) from the vehicles. In an article by InsideEV’s (link here), information shows a large improvement when it comes to safety when comparing EV’s with standard vehicles. This could bring down the price of premiums.  One possible solution in the short term is to raise other parts of the monthly premium as the vehicles are generally more expensive and can be more of a steal target because of the newness of the segment.

Taxing authorities should already be figuring out solutions to this issue. The more electric vehicles that are registered in the state, the less revenue they will receive from taxes on gasoline. For example, in my home of Chicago, taxes on a gallon of gas are around $0.30 per gallon. I sure hope they are working on a plan that replaces this revenue. Because with more and more EV’s hitting Illinois roads, revenue is increasingly getting smaller and smaller. But there are alternatives like a flat annual tax on EV’s or an increase in taxes for electricity not generated by NFES. Also, promotion of these vehicles will increase the favorabel environmental effects which should offset some of the financial loss. There aren’t too many administrations who end of badly for making their area cleaner and healthier for their constituents. If you have or plan to buy and EV, reach out to your local office holders and remind them of the benefits for the area.

There are more than a few issues facing the oil, insurance, and taxing authority agencies when it comes to handling the increase of EV’s on the road. But there are ways to continue profitability and success while embracing the change. It is very important not to have blinders on or have your figurative head in the sand at this moment. Acknowledge what is, and plan and act however needed.