CDK Global's $8.3 billion deal to go private could accelerate growth

CDK Global Inc. plans to join its privately held competitors in the dealership management system market this year, perhaps giving the company more flexibility to pursue longer-term growth strategies than public shareholders want to tolerate.

The decision to take CDK off the Nasdaq exchange by selling to global investment firm Brookfield Business Partners — in a deal valued at $8.3 billion — will accelerate the company's growth strategy around creating a seamless vehicle-purchasing experience for consumers, COO Joe Tautges told Automotive News.

"We've done fine as a public company, and we've done a great job over the last several years really improving the core business," Tautges said Thursday. "We saw a great opportunity to create value for [shareholders] and really align with a buyer here who is a very value-added, reputable private equity owner. And it just levels the playing field, quite frankly."

It's too early to know how the ownership change will play out for CDK, as the Hoffman Estates, Ill., company expands beyond its core DMS business into such areas as digital retailing, insurance technology and data insights. It's also updating its internal technology and processes. Brookfield's planned acquisition likely won't have an immediate effect on CDK's dealership customers — it counted 9,181 automotive DMS customer sites as of Dec. 31, although automotive customers using its products in North America number about 12,000 — but it could generate more interest in shorter-term DMS contracts given the change ahead, some said.

CDK CEO Brian Krzanich said the company “will operate independently as a part of Brookfield” in a letter to employees Thursday that was shared in a regulatory filing.

CDK going private is the latest move in a DMS market already in flux. During the past two years, DMS provider Auto/Mate was bought by dealership technology company DealerSocket, which was then acquired by Solera Holdings Inc., a portfolio company of private equity firm Vista Equity Partners. Reynolds and Reynolds Co. gained new leadership that is overhauling the business after longtime CEO Bob Brockman was indicted on federal tax evasion charges in 2020. And DMS startup Tekion has seen its valuation soar to $3.5 billion after multiple funding rounds and is adding new products, including digital retailing.

"One of the things that Tekion highlighted was that you can bring excitement and huge amounts of funding into a very old and kind of stale space," said Matthew Gillrie, owner of the Gillrie Institute, which advises dealerships on DMS contract negotiations.

Gillrie said he has seen an increase in dealerships signing three-year DMS contracts, rather than five-year deals, even before CDK's acquisition news in part because dealerships want flexibility to react to new market entrants and updated technology.

CDK's sale may contribute to "an increase in an already healthy market of people wanting shorter-term contracts," Gillrie said. He added that the hope would be for Brookfield to "use this to make CDK even better and improve things, and it just spawns more competition."

Michael Alf, dealer principal of St. Charles Toyota in Illinois and a CDK customer for nearly 20 years, told Automotive News that he hopes Brookfield retains CDK's current leadership team and invests in long-term growth, including of its core DMS product.

"If they're looking for a long-term strategy, this could be one of the best things," Alf said, adding that CDK's rivals are all privately held and can invest in longer-term R&D.

"They're moving in the right direction," he said. "As long as they continue that growth, things will be fine. But if it's just a quick acquisition to flip in a few years, it could be devastating to the company."

Brookfield Business Partners is a unit of global alternative asset management firm Brookfield Asset Management's private equity group.

Brookfield will purchase all of CDK's outstanding shares, and CDK shareholders will receive $54.87 per share in cash when the transaction closes, which is expected in the third quarter, CDK said. The price would reflect a 30 percent premium to CDK's closing share price Feb. 18, which the company said was the last full day of trading before market speculation began about a possible sale.

The company did not disclose details about its process of seeking bids, other than that CDK's board considered "strategic and financial alternatives over several months" before selecting Brookfield.

In a news release, Brookfield said CDK is attractive for its market leadership; its recurring, subscription-based revenue streams; the potential for upside amid consolidation in auto retail; and what it said are "meaningful opportunities" to improve CDK's value.

"We are excited to grow our technology footprint with the acquisition of CDK Global, and we look forward to leveraging our operating capabilities to build on the company's track record of providing best-in-class customer service and innovation," Doug Bayerd, Brookfield Business Partners' managing director, said in a statement.

A Brookfield representative did not respond to a request for additional comment. Tautges said decisions about CDK's leadership team had not been made ahead of the transaction closing.

Analysts who follow CDK told Automotive News that the company has been investing in growing its product lineup, but that strategy hasn't aligned with investor expectations.

"The company was not getting rewarded for what they were doing," said Gary Prestopino, managing director at Barrington Research, who follows CDK.

Shareholders of a public company want to see consistent earnings growth, Prestopino said, which does not always occur when the company is investing for the future.

"This is the best possible outcome, I think, for the executive team of CDK in terms of taking it out of the public eye, being able to build this thing over the next couple years without having to worry about meeting quarterly investment expectations," he said. "And in a couple of years, they may have it where they need it to be, and they may take it public again, or it may be a private equity trade."

Ian Zaffino, managing director and senior research analyst at Oppenheimer who covers CDK, said going private could allow CDK to refine its tools to help dealerships compete online, including digital retailing provider Roadster and Salty Dot Inc., an insurance technology company that allows consumers to buy auto insurance during a vehicle purchase. CDK also launched CarSource, a new wholesale marketplace platform, in February.

"For CDK, what it means is you don't have to answer to investors anymore, so you're able to kind of execute on a lot of the things that you weren't able to previously," Zaffino said. "They did a lot of these different strategies, and I think these strategies all sort of need to be nurtured, and the only way you can get nurtured is not having investors hounding you every quarter to see what your quarterly results are."

CDK has been the subject of sale speculation before. The company in recent years divested units, including its digital marketing and international businesses, to focus on its core North American software market.

Tautges said Brookfield shares CDK's interest in innovation and will accelerate ongoing work to help dealerships and automakers with the digital transformation in retail.

"I don't know ultimately what the [Brookfield] exit would be," Tautges added. "Right now, we're just focused on continuing to execute and do what we do, really welcome Brookfield to the family and take good care of our shareholders."