Legal Executive Institute Automotive Conference

October 4, 2018

Changing State of Automotive M&A

Sources:

“Rethinking Transportation 2020-2023” RethinkX

Thomson Reuters, Bloomberg, Capital IQ and other publicly available sources

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.

Global Electric Vehicle Fleet & Demand for Battery Capacity

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2017 2019P 2021P 2023P 2025P 2027P 2029P

Global Fleet of Electric Vehicles gigawatt-hours (GWh)

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2017 2019P 2021P 2023P 2025P 2027P 2029P

Individual Ownership Miles Ride Sharing Miles

Speed of Ride Sharing Adoption in the U.S.

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53%41%

6% Non-tech acquiring tech

Tech acquiring tech

Tech acquiring non-tech

42%

25%

11%

8%

3%

11%

Alternative powertrains

Connected car

Autonomous vehicles

Online dealerships/trading

Ride sharing

Other

2017 Auto-Tech Deal Volume 2017 Auto-Tech Deal Volume by Sub-Category

The Growth of Auto-Tech

2 10

5 8

98

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Private Investment in Connected and

Autonomous Vehicle Companies

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

(in $mils)

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 startupSource:

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 Ownership from Joint

Collaboration

Obligation to Defend and Indemnify

Patent Enforcement Entities Levy

Tolls

IP Protection

Mix

Competitive Landscape Disruption: Each Has Own Vision and Experience in IP

Entirely New

Players

Traditional Auto

Players

Large Tech/Small

Tech

Common IP Issues for ADAS/Other Integrated Products – Landscape

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?

Common IP Issues for ADAS/Other Integrated Products – IP Ownership

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 state-owned 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 cross-border 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.