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Volkswagen and Porsche Restructuring, Takeover?

July 14, 2012 | About:
Muhammad Bazil

Muhammad Bazil

3 followers
After much discussion over how the two companies would conduct business, Volkswagen (VLKAY) & Porsche (POAHY) have announced a new agreement that Volkswagen will buy all remaining shares in Porsche. VW shares rose prominently at 5.3 percent and Porsche shares rose 1.3 percent. The announcement included plans to purchase the company’s remaining stock at 4.46 billion Euros in cash to gain the remaining 50.1 percent of the Porsche auto company.

Sales are currently running high at Porsche, up 20 percent over previous records. The company previously lacked in production capacity, but because Volkswagen specializes in production of multiple lines and efficiency the end result was a perfect marriage with Porsche. VW already has plans to produce some Porsche models in VW assembly lines.

VW estimates that by integrating the Porsche auto line’s strong sales with VW led production capacity the company can save upwards of 700 million Euros, and erase 2 billion Euros in debt that Porsche incurred.

The merger has been ongoing as far back as 2009 when Porsche attempted to purchase VW by taking out 9 billion Euros in debt. VW had abandoned previous plans to merge on the basis of lawsuits brought on by short sellers in Germany, and the US. Other reasons included the secret purchase of VW shares by Porsche.

The full merger is expected to take place on August 1st. VW is expected to boost annual financial earnings by 9 billion Euros, while cash reserves and net liquidity are expected to drop 7 billion Euros.

Thanks a Billion

You may be wondering why I haven’t given a clear definition of the company merger. The real reason is because on paper the new merger is simply a restructuring plan. The truth is that by buying one common stock share of VW, German tax law allows for the deal to be considered a restructuring agreement between the two companies. The end result is that Volkswagen under a merger agreement would be liable to pay 900 million Euros ($1.1 billion) in taxes. The company is now expected to pay only 100 million Euros in taxes. By purchasing one common stock share, they have been able to avoid what could have been a costly acquisition tax wise.

The deal was concocted by Michael Schraden a tax lawyers at Ernst & Young in Stuttgart. The German trained lawyer also holds a license in New York and remains one of Porsche’s most trusted advisors according to close friends.

The tax plan allowed the two companies time to move ahead with the merger two years sooner than expected. The quick move also ended the 7 year battle between the Porsche and Piech families.

The move has also spawned criticism from the Merkel government in Germany, whose parliamentary leader Rainer Bruederle had this to say ‘When global companies can save billions with such tax tricks, then every taxpayer has to feel like they’ve been had, Many skilled workers can only dream of so much charity from the tax offices.’

VW responded to the criticism saying it was ‘irresponsible.’ ‘It’s populistic to talk of tax tricks and forbearance from the authorities,’ Stephan Gruehsem, VW spokesman, said in a statement. The basis for billions in unpaid taxes was “utterly unfounded,” he said.

VW & Suzuki Breakup

After what totaled a $2.1 billion partnership began in 2009 Suziki (SZKMF) has begun a legal battle to have VW return those shares, against VW’s wishes.

The battle began over a dispute that the shares were intended to be a means for VW sharing technical information with Suzuki. VW cites Suzuki’s deal with Fiat for a small displacement engine, the two companies are set to battle in a London court.

Suzuki is willing to pay market value for the return of their shares, which would hand VW a healthy profit of $300k, to $400k; the stock is not worth much though. VW is fighting to maintain their stake in the auto maker that could withdraw from the US market.

Analysis

It seems to me that the merger is a good thing, with VW’s ability to streamline operations and turn a profit. We have to remember how the car maker turned a failing Audi into a premier brand again. Second, by avoiding a stiff $1.1 billion in taxes the company was able to add 7 percent to their earnings potential this year.

While the European economy is teetering on disaster, German automakers are still likely to report increased vehicle deliveries this year. The German economy is still set to grow .6 percent, while the eurozone will contract .3 percent. Exports in the German economy beat analyst predictions, jumping 3.9 percent.

I think that while the rest of the eurozone could become problematic, the German auto maker is proving it’s ability as a strong exporter to other markets such as China. The country is by far the largest sales region for the auto maker, which was able to sell 2.3 million vehicles in the previous year alone, up 17 percent from the previous year. The auto maker saw overall increases in global sales of 14 percent, totaling 8.2 million cars last year.

In my opinion the strong resilience of the automaker will continue despite other problematic situations within the eurozone, Buy

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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