There are different ways in which a company can stimulate growth either internally or internally. External growth as defined by Block, Hirst and Danielson is the growth of firms through amalgamation, mergers or takeovers/acquisitions. The authors define a merger as being ‘the agreed amalgamation between two firms.’ There are different types of mergers namely vertical, horizontal and conglomerate merger (Block et al, 2008).
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History of the relationships of the two companies leading up to the final merger in 2009
Volkswagen and Porsche are two firms that are well recognized and established in the automotive industry. Based in Germany, both companies were founded by Ferdinand Porsche in the 1930s and have remained in the Porsche and Piech families to date.
There has been contention and rivalry, some fuelled by family differences between the two firms; in 2005, Porsche, the smaller of the two companies, began a takeover bid that included buying Volkswagen stock. This plan might have worked had Porsche not fallen into financial constraint (Anon, 2009).
Volkswagen had to step in with a merger proposal which Porsche fought off fiercely but finally had to give in to because it would mean an infusion of much needed cash into the latter firm’s fried up coffers. The merger between the two companies, which hit a couple of snags, was finally ironed out in late 2009 (Kingsbury & Dauer, 2009).
A brief description of the firms Volkswagen and Porsche and the automobile industry
The automotive industry is feeling the pinch of the global economic recession. The two auto makers are not the only companies to go the way of the merger. There are other acquisitions that have taken place recently and by all appearances it looks like there are many more on the way. Fiat, the Italian car making firm, has plans to acquire Chrysler as well as Europe’s branch of General Motors.
VW is the biggest carmaker in Europe having annual sales in the excess of US $151 billion and selling up to 6.7 million units a year. Porsche has lower revenue of US $9.3 billion selling about one hundred thousand units annually (Kingsbury & Dauer, 2009).
Porsche and Volkswagen have a long history that goes way before the issue of a merger arose. Ferdinand Piech and Wolfgang Porsche, the respective chairpersons of the two firms, are the grandchildren of Ferdinand Porsche who foundered both companies in the 1930s.
Members of the Porsche and Piech families own between them 50% of Porsche Automobil SE stock. The two firms have even collaborated in the past to put on the market vehicles such as the Porsche Cayene SUV and the Touareg whose parts are manufactured in the same plant (Anon, 2009).
Competition within the automobile industry
The automobile industry is very competitive, more so in the face of the global financial crisis that has shaken even the strongest of giants. The top ten brands on the global market are Toyota, General Motors, Volkswagen, Hyundai, Ford Motor, Company, Peugeot, Honda, Suzuki and Renault.
In the biting recession, the motor industry has been hard hit with major companies such as GM and Chrysler seeking bankruptcy protection from their governments or opting for mergers. The units of sales have declined sharply and profit margins have narrowed. Being in the automobile industry is simply not as lucrative as it was before the recession (carazoo.com, 2009).
Why the Volkswagen-Porsche merger is a vertical merger
There are three different types of mergers namely horizontal, vertical and conglomerate mergers. A conglomerate merger is one between two firms that are in two totally unrelated fields of business while a vertical merger is one that takes place between two firms in a related business but with one being the buyer and the other the seller.
A vertical merger takes place between two firms in the same line of business and who are competitors of each other (Block et al, 2008). Thus, the merger between Porsche and VW is a vertical merger because both firms are in the automotive industry.
Why the Volkswagen-Porsche merger is a ‘friendly’ acquisition and the concerns regarding the acquisition
The merger between VW and Porsche can be termed as a friendly merger because the terms of the merger have been negotiated by directors of the two firms until they have worked out an agreement which both parties find satisfactory. There was a three and a half year tag of war between Volkswagen and Porsche before the two companies finally hammered out a deal that was satisfactory to both. Porsche initially wanted total acquisition of VW, going as far as buying up 75% of VW stock, but had to settle for a merger (Boston, 2009).
What VW plans to do is to take the brand names, along with other brands already under VW, and consolidate them into a holding company which Porsche terms as being an ‘integrated leading company’ (Boston, 2009).
Synergy gains, portfolio effects, taxes, risk and the Volkswagen-Porsche merger
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Firms create mergers for a varied number of reasons; these can either be financial or non-financial (Block et al, 2008). The reasons behind the merger between Volkswagen and Porsche fall into both of these categories. One of the motives that can drive firms to form mergers is on a bid cost savings; this is to the cut down on the cost of growth as compared to gearing internal growth.
Taking over from a destabilized firm is more cost effective than trying to generate growth using the resources that are already at the firm’s disposal. Acquisition means that the resources that were available to the acquired firm are now at the disposal of the firm conducting the acquisition (Block et al, 2008).
A non-financial reason for carrying out a merger is for its managerial rewards. A firm may have the aspiration to expand its management and marketing capabilities while at the same time acquire new products to add to its brand. While this can be done through internal growth, it would be more expensive and take a greater deal of innovativeness and the dedication of a more company resources.
Through acquisition, the firm can achieve all of the above in a way that is actually beneficial to itself. Those on the management team of the acquiring firm might be presented with the opportunity to get lucrative management positions that result from the merger (Block et al, 2008).
For a firm like Volkswagen, there is also power play involved. Porsche and VW have been waging a power struggle for years now, with either company trying to outdo the other. Porsche incurred a debt of US $2 billion while covertly buying VW stock in a secret takeover bid. The thrill and prestige of whoever was to get the last laugh has shaped the way the two firms are going about their merger with VW seemingly turning the tables on Porsche at the last moment (Anon, 2009).
The former CEO of Porsche, Wendelin Wiedeking saw the merger between the two firms as a way of making them into a single holding so that there would be created an economy of scale.
Wiedeking’s reasoning was that if Porsche became a part of the VW group, then the former would not face the stiff penalties governing carbon emissions by automobiles that have been put in place in Europe since VW has automobiles that are considered fuel efficient and low-emission. Porsche’s automobiles would then segue in with the VW ones without attracting too much attention (Boston, 2009).
But why would the stockholders be willing for a merger to take place? Stockholders can be motivated to back a merger because for them it means that if the merger transaction is to be conducted in shares, then they will have the chance to acquire stock in the new company (Block et al, 2008).
Stockholders can also get a chance to branch out into new and varied investments if the merger transaction is performed in cash. Taking the example of VW and Porsche, stockholders in the VW firm will be presented with the opportunity to acquire Porsche shares and stock.
Mergers can be good for shareholders because it will mean more value on the shares. Mergers have the potential of raising the earnings per share because of greater confidence of their value on the stock market (Block et al, 2008).
When a large firm acquires a smaller one, the acquiring firm can make a quick profit by asset stripping. For the acquiring firm, a profit can be made by selling off assets brought in by the acquired business (Block et al, 2008).
A firm can be financially inclined to form a merger because of the resulting ‘portfolio effect’. This results when a firm can reap the benefits of economies of scale, cutting down on production costs as output increases on fewer resources, having a more extensive market reach and a broader market segment, as well as building up its tying and bundling techniques (Block et al, 2008).
A merger can also make a firm more attractive to investment bankers who show an interest in financing projects that the firm might run in the future. Mergers may make a firm appear more financially sound and make it more viable to lending institutions. This is probably, another portfolio effect, because of the diversification of risk, without compromising the firm’s rate of returns (Block et al, 2008).
Another non-financial reason for conducting mergers is to create synergy so as to cut down on production costs while at the same time increasing output. It is more profitable to apply a larger production unit to achieve a given task as compared to having smaller units performing the same tasks independently (Block et al, 2008).
As has been illustrated above, mergers can be beneficial to the acquiring firm because it creates room for growth. Mergers also have a portfolio effect in that the acquiring firms can access a larger market segment, spread their risk, capitalize on synergy and add to the value of their stock.
The merger between Volkswagen and Porsche has taken nearly three years to work out. In the end, it will be beneficial to both firms since, being powerhouses on their own, their combined name will be an even more marketable brand. Again, Volkswagen can infuse the cash needed into Porsche to get the ailing firm out of its financial doldrums. Despite the initial hefty taxation costs that Volkswagen will have to pay in its acquisition of Porsche and the added risk of possible suits from hedge funds, the acquisition of Porsche can be considered a feather in VW’s cap.
Anon. (2009, July 20). The World from Berlin: New Hurdles for VW-Porsche Merger. Spiegel Online International. Web.
Block, S., Hirt, G., & Danielsen, B. (2008). Foundations of Financial Management (13th ed.). New York: McGraw HIll.
Boston, W. (2009, May 7). Porsche and VW Agree to a Merger. Time Magazine. Web.
carazoo.com. (2009, October 7). Top 10 Car Makers of the World of 2009, Page 2 of 2 – Associated Content – associatedcontent.com. Automotive.
Kingsbury, K., & Dauer, U. (2009, August 14). VW Seals Deal for Porsche in Reversal of Fortune. WSJ.com. Wall Street Journal. New York. Web.