Volkswagen and Porsche to enter a full-blown merger with former being dominant

Friday 06 July 2012, 11:36 AM by

Volkswagen, the German luxury car maker has finalised the long awaited decision to purchase another indigenous car maker Porsche on August 1, 2012. The decision rolled out from company’s stable two years ahead of the planned date in order to seal the deal without being liable to pay tax. According to a VW statement, as per the agreement, it will pay the holding company, Porsche SE 4.46 billion Euros along with a single common share of Volkswagen. The single share of VW received by the Stuttgart based sports car maker may ensure that the deal is classified as reorganising under reorganisation tax law of Germany and help VW to avoid taxes.

In August 2009, the maker of powerful 911 sports car agreed to have a merger with VW, after it ended up acquiring a debt of more than 10 billion Euros in an useless attempt to own VW. Thereafter in December 2009, VW purchased 49.9 per cent stake in Porsche’s auto business, after Porsche’s debacle.

However, while settling upon this deal the approval from German Tax Authorities is one crucial hurdle that both the car companies had to battle with. Volkswagen has been pondering upon the alternatives to the 2009 agreement under which both the companies were supposed to undergo a full merger by the end of 2011. The alternative that VW came up with was to consider acquiring the remaining stake in Porsche's car business for 3.9 billion Euros. This would have made Porsche to hold 50.7 per cent of VW's common stock.

Chief Financial officer (CFO), VW, Hans Dieter Poetsch, said, “The accelerated integration will allow us to start implementing a joint strategy for Porsche's automotive business more quickly and to realize key joint projects more rapidly.”

The complete merger of Porsche's auto operations in VW will surge the annual financial output of the latter by over 9 billion Euros and will reduce the total liquidity by nearly seven billion Euros. Both car makers have been really keen upon integrating their auto businesses to save nearly 700 millions Euros and to omit a debt worth of 2 billion Euros on part of Porsche.

Since then, both the auto makers have been weighing options to evade taxes worth 1.5 billion Euros, which they will have to pay in case they finalise the purchase before August 2014. According to a Volkswagen statement, “The accelerated integration model that has now been agreed can be implemented on economically feasible terms.”

However, during September 2011, VW stepped back from the merger on grounds of unquantifiable legal risks which included legal cases filed by short-seller in US and Germany. They believed that the Porsche inventoried the VW shares and imposed billion dollars worth of losses on the part of investors.

Analyst, Credit Suisse, David Arnold feels that at 4.46 billion Euros Volkswagen is paying only half of the complete merger which would have cost 8 billion Euros otherwise. He said, “It's a great deal for VW, both financially and in operative terms.”

Both the companies are slated to hold a joint press-conference to declare the details of the merger on July 5, 2012 in Wolfsburg.

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