The automotive industry dealt with a major disruption in June when CDK Global experienced cyber attacks that “crippled the platform.” The attack on CDK meant that nearly 15,000 car dealerships went analog for weeks as dealership staff struggled to carry on business as usual. Every order, every transaction, every customer or parts query, every financial entry – you get it.
CDK is one of the most widely used dealer management solutions (DMS) among car dealerships. In short, it is the critical infrastructure software and digital backbone of the dealership, enabling them to process transactions (sales, service, parts orders) and conduct administrative tasks (like monitoring employee compensation), as well as business insights (like tracking store profitability). CDK can also support finance, insurance, repairs, and maintenance.
The initial attack occurred on June 19, and CDK dealt with the aftermath into July before resolving the issue on their end on July 3. Clean up continues at the dealership level as employees struggle to enter data and close out June financials. The second quarter will be affected and time will tell whether consumers who were unable to purchase or receive service during the shutdown will simply return later this summer. Insurance claims, lawsuits and other resource draining biproducts will continue for months and probably years. CDK Global is already facing lawsuits from several different parties, suggesting that CDK “did not adequately protect customer data and that the personal information of tens of thousands of people was likely exposed in the hack.”
But eventually, this will be in the rear-view mirror…wrong.
More Margin Challenges
Not that the retail automotive industry wanted to hear this but here it is: The CDK Cyber Attack will have a direct, systemic impact on margins. This latest challenge to retail automotive comes at a time when margin compression is persistent, and growth is stagnant. Dave Cantin Group sees three things impacting dealership bottom lines coming as a result of the attack:
Increased Platform Costs: CDK and other DMS providers will be forced to spend huge sums of money upgrading their relatively archaic software and even more in new security measures. These sorts of costs are almost always passed on to the customer in some way.
More (and more expensive) Insurance: Every dealer is going to be forced to review their cyber insurance and business interruption insurance, resulting in new policies. With the new risk post-attack, insurance companies are going to be looking at new ways to assess their own risk which will undoubtably including higher premiums.
Regulation and Compliance: The final straw will be increased regulation and compliance, especially in certain states. While there may not be direct costs associated with this, it will take more time and resources to operate.
None of these will bankrupt a dealership but in a business sector struggling to find ways to maintain profitability, it’s one more tally on the wrong side of the ledger. To assist with the financial challenges associated with the cyber attack, CDK’s CEO announced financial compensation to affected dealerships. Specific plan details are expected soon.
The Impact on Mergers and Acquisitions
What do the CDK cyber attacks mean for automotive merger and acquisition activity currently in progress? Automotive News recently explored that question, including insights from Dave Cantin of DCG. The DCG team is currently managing about 30 dealership transactions at different stages across the country. In the Automotive News article, Dave Cantin noted that the cyber attacks did represent a “significant event” that could potentially slow down essential tasks in the merger and/or acquisition process — including due diligence. But he also stated that “no closings have been delayed” because of the CDK issue.
“We are going to be considering possible extensions through due diligence and also possibly extending closings in the very short-term, if need be,” he told Automotive News. “Most likely, we don’t feel as if this will affect anything that’s weeks out; it’s just the very near future of the next week or two.”
But what does this mean for M&A longer term? Dealers, especially those with fewer stores are telling us this is yet another impetus pushing them to sell. It is not that they had to go through the CDK challenge for a month, the dealer body is far too resilient for that. This issue is just one more proof point that the business is becoming more difficult, especially for smaller dealers with less scale and fewer resources. This will be a positive force for continued M&A activity and further consolidation away from smaller dealers.
Expert Guidance for Your Next Transaction
It’s always a good idea to secure a trusted advisor as you consider or pursue merger and acquisition opportunities. This is true for any transaction, but it’s especially true for transactions occurring against the backdrop of an industry-wide disruption.
At Dave Cantin Group, we serve as expert advisors for dealerships at all stages of the M&A process. Get in touch to learn more about our services and how we support your business objectives.