Higher bid is a fly in Magna's ointment

Editor's note: This story has been updated to correct the name of Veoneer's recently launched vehicle software solutions business.

TRAVERSE CITY, Mich. — Swamy Kotagiri suddenly has a nasty wrinkle in his plans at his new job.

Barely half a year into his post as CEO of Magna International Inc., Kotagiri just two weeks ago initiated one of the industry's biggest blockbuster deals of the past few years: offering $3.8 billion in cash to buy the Swedish advanced driver assistance supplier Veoneer — a move that could potentially lift Magna to new heights.

The Ontario parts company is already North America's largest, with 2020 sales of $32.65 billion. Folding Veoneer into Magna's diverse array of skill sets has the potential to take Magna places that Kotagiri really wants to go, he told Automotive News last week at the Center for Automotive Research's Management Briefing Seminars.

But one day later came the wrinkle: Qualcomm topped his offer.The San Diego-based wireless technology company and semiconductor producer last week put in its own bid for Veoneer — for $4.6 billion. Also in cash.

The situation remains fluid, and there is no way of knowing yet where Veoneer will end up. On Sunday, Veoneer said it would negotiate with Qualcomm in anticipation of a “superior proposal.” If Qualcomm prevails, Magna would get a $110 million termination fee, which is a standard legal provision set in mergers and acquisitions. Veoneer shares closed down 3 percent at $37.54 on Monday.

But the surprising development — both of them — illustrates a new reality in the global auto industry.

On one hand, there is Qualcomm, a high-tech company — smaller than Magna, at $23.5 billion in 2020 sales — that like other tech giants has a vision for capturing new opportunities in the increasingly software-driven automotive space.

On the other, there is Magna — a decades-old auto stalwart, making everything from seats and metal parts to electric-vehicle drives and complete, finished vehicles. While Qualcomm wants Veoneer to help it move deeper into the auto business, Kotagiri wants Veoneer to help his traditional auto company move further into the technologies that are new to the industry.

Before the bomb hit last week, Kotagiri was expansive in his view of the Veoneer deal.It is not merely that Veoneer is a big player in automated driving technologies, Kotagiri made clear. There is something more important about Veoneer.

For starters, Veoneer, which was spun off from Sweden's Autoliv in 2018, is a jackpot of software engineers at a moment when the entire industry is searching for more software engineers.

"One of the variables definitely is the software capability," acknowledged Kotagiri, a 52-year-old engineer, tall and mustachioed, born in India, who took a job with General Motors trucks when he came to America. "Out of their total 7,300 work force, there are about 4,000 engineers. And 1,700 of them are software engineers."

Equally attractive for his vision of Magna's future is a new vehicle software solutions business that Veoneer recently launched, called Arriver.

"People might be looking at this as Arriver being only a software stack for ADAS," or advanced driver-assistance systems, Kotagiri said. "But I look at it as the software stack for other products."

It would provide a way to begin stitching together many of the components and systems that Magna already makes, the CEO said, such as mirrors, cameras, powertrains, transmissions and electrical systems, helping to lift sales of all of them.

"A camera looks at the road conditions, but in the future we believe there will be a connected powertrain which will decide which wheel needs to get the torque.

"We have mirrors today and we have rearview cameras. How can we think of that as a system instead of two independent pieces? You bring them together through software. The mirror is a display, but I can use a feed coming from the rearview camera and start to provide feature functionality. The driver monitoring system inside can start performing child-left-behind functions and other things. A lot of things will come together through software."

Qualcomm has its own vision for how Veoneer could help it move forward in the auto industry.

As the California bidder sees it, the proposed acquisition "reinforces the company's commitment to bring advanced technologies to the automotive industry and represents a natural extension of Qualcomm's digital chassis solutions.

"The proposed acquisition will bring together our industry-leading automotive solutions with Veoneer's assisted driving assets to deliver a competitive and open ADAS platform to automakers and Tier 1 suppliers at scale," the statement said, attributing the comment to CEO Cristiano Amon.

It used untraditional phrasing to refer to Qualcomm's growth in automotive, saying that Qualcomm now has a "revenue-design win pipeline of approximately $10 billion."

"As the automotive industry continues to transform, it is becoming increasingly important for automakers to have a partner who develops horizontal platforms that drive innovation and enable competition," it said.

Magna is certainly in no jeopardy if Qualcomm snatches the Veoneer prize from its hands. One outside financial executive familiar with Magna's strategic moves, who asked not to be identified, said that Magna has long been one of the best-managed suppliers in the world, adding that it is a testament to its strength that it was able to offer $3.8 billion in cash for Veoneer even after a year of pandemic complications and revenue-trimming customer shutdowns.

Magna is not merely in the metal stamping business — it is the largest "metal forming" supplier in the world. It is not merely in the transmission business — it is the world's largest independent producer of transmissions, as it is of four-wheel drive and all-wheel-drive systems.

It is the largest maker of side mirrors, by its own reckoning, and one of the largest producers of door latches. And even without acquiring Veoneer, it is one of the largest suppliers of camera-based ADAS systems.

"We're not saying you have to buy everything from Magna," Kotagiri said of the bigger future he wants for the company by linking together its component systems. "But we want to think farther out, and say how can we do this in a modular way? There's a huge addressable market to be had there and that's what we want from Veoneer."

There is also, he adds, a bigger role for Magna to play building vehicles for new companies who have their sights set on becoming vehicle manufacturers — "new entrants," as Kotagiri calls them.

Magna's vehicle-assembly subsidiary, Magna Steyr, produces complete vehicles on a contract basis in Austria, with customers that have included Jaguar and Mercedes-Benz.

Magna has long wished for an opportunity to expand Steyr's production footprint to North America, if given a customer base that can commit to vehicle programs that last for several years.

Although remaining vague on the matter, Kotagiri said last week that Magna is having "ongoing discussions" with potential customers — he did not reveal with whom — that could necessitate Magna building a North American auto assembly plant. But he specified that there is no firm plan yet.

The Veoneer deal could help with that, too.

Being able to weave together systems into unified architectures would, Kotagiri said, enable Magna Steyr to help a new entrant get a vehicle into production faster — and enter the market faster.

"If there is a new entrant looking for fast-to-market solutions, we can provide an overall electrical architecture completely as a system," he said.

What happens next with Veoneer may be more of a reflection of financial markets than of automotive supplier outlooks, said Jeff Schuster, president for global vehicle forecasting at LMC Automotive.

The fact that Magna was willing to pay $3.8 billion in cash for Veoneer, and now Qualcomm is willing to raise the bid to $4.6 billion, illustrates that values are rising for technologies that address a different approach to autos in the future.

"What's valuable today is changing," Schuster observed. "That says something about the industry's view of the change that's coming."