Wednesday, July 18, 2012

The VW, Porsche marriage is back on track

By Paul A. Eisenstein, The Detroit Bureau
The on-again/off-again tie-up of Porsche and Volkswagen finally is set to be completed after a series of potentially costly snags that threatened to scuttle the deal.

The marriage – which follows an abortive David-and-Goliath effort by the smaller maker that triggered an assortment of lawsuits and a feud within the extended Porsche family – is “expected…to take effect as of August 1, 2012,” Volkswagen says.

Despite earlier fears that the tie-up could leave them vulnerable to billions of dollars in legal costs due to those lawsuits, the makers now contend the merger will generate a “clearly positive impact on consolidated profit(s).”

“We will concentrate all our strength on the operative business and the solid, profitable growth of the company,” says Volkswagen CEO Martin Winterkorn, adding that the newly combined firm should achieve “long-term synergies of about €700 million per year.”

“In the end, it’s all about the money,” said analyst Joe Phillippi, of AutoTrends Consulting. And once Porsche found a way to minimize the potential financial risks, Phillippi believes it was inevitable the deal would be completed.

The merger will come as a peaceful end to one of the most bitter battles the auto industry has seen in years. In a highly unlikely scenario, Porsche began accumulating shares of the bigger maker hoping to take over VW. But when it couldn’t complete the hostile acquisition Porsche found itself saddled with 10 billion Euros of debt. That led to the ouster of the maker’s once-celebrated CEO Wendelin Wiedeking.

It also threatened to lead to even more financial problems for Porsche as investors accused it of breaking various securities laws in its attempt to acquire Volkswagen.

The two makers agreed to a merger in August 2009 but put that deal on hold as the lawsuits – and potential risks – facing Porsche began to mount.

They’ve recently taken several critical steps to reduce their potential risks – while they also came up with a strategy to avoid as much as 1.5 billion Euros in taxes on the merger. The deal will be classified as a restructuring under Germany’s reorganization tax law.

Volkswagen already holds a 49.6% stake in its German rival. It will now assume Porsche’s remaining shares for a 4.46 billion ($5.9 billion) payment and issuance of a new common share to the Porsche holding company.

Adding to the complexity of the deal was the fact that it started out, as much as anything, as a feud between rival factions of the Porsche family. Wolkfgang Porsche, whose grandfather started the iconic sports car company, is a cousin of Ferdinand Piech, chairman of the Volkswagen AG Supervisory Board.

Observers suggest that once he thought he could win that internecine battle Piech was bound and determine to eventually make the deal come together.

But he isn’t the only one pleased that the merger will occur. Investors drove sharp gains for both VW and Porsche shares Thursday.

In the long run, analyst Phillipi contends the deal should pay off handsomely. “Both companies have lots of unique technological expertise they will now be able to leverage by working together,” says Phillippi, adding that with all the new emissions and fuel economy mandates being put into place – never mind increasing competitive pressures, “being able to spread your costs across a wider number of products will be more important than ever.”

Once focused on just a handful of high-performance models, Porsche has rapidly expanded its product mix in recent years, adding models like the Cayenne SUV and Panamera 4-door sports car. It is now readying a smaller SUV and is expected to add still more products.

The question that concerns some analysts is whether Porsche will be able to maintain its distinctive brand identity, something buyers pay a hefty premium for. But proponents note that VW has been able to maintain the unique identity of several other high-line brands, including Audi, Bentley and Lamborghini.

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