Mergers and acquisitions can shake up the market. A company purchasing a share in another could benefit both the organizations and cause a resultant share price hike. When you carry out online stock trading, that’s what you need to watch out for.
Benefits for VW and Navistar
Volkswagen AG (VW - $VKLAY) is a major truck manufacturer in Europe, apart from its automobiles. $VKLAY is now looking to secure a significant foothold in the American truck market by investing in Navistar International Corp. ($NAV), the American truck and bus company. Having purchased a share of 16.6% at a $15.76 per share price, VW looks to make its presence felt in the lucrative truck segment in the United States:
- This deal could give $VKLAY a major potential for increasing sales and profit, thanks to Navistar. The latter has a strong dealership network around the nation as well as service centers, though its market share has actually come down by half in the heavy-duty engine segment during the past five years.
- This deal will also help $NAV significantly by giving it much-needed cash to the tune of $250 million. It needs as much as it can get since it has accumulated debt worth $5 billion. In its financial year ending October 2015, it lost $184 million. Just four years back the company was close to bankruptcy.
Controversies for Both the Companies
Navistar also gave investors the false idea that it was actually developing a new engine to meet US emissions standards. For that the company reached a settlement with the SEC this year to pay a fine of $7.5 million for misleading the investors.
And we do know that Volkswagen itself has not been clear of trouble with the authorities. It has been embroiled in the US emissions cheating scandal when the US EPA detected in 2015 that VW was cheating on emission tests. The scandal was a global one and cost much for the company in terms of money and reputation. In the US, the settlement and other related issues set VW back by $20 billion in the past year.
Regardless, the deal will give $NAV a much needed financial injection. Cost savings are expected to be in the region of $500 million in the initial five years of the deal thanks to the combined synergies of both the companies, while savings worth $200 million are expected in the years after that. That could help the company return to profitability.
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