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Porsche, Corona Buyouts Tap New High End Consumers

Porsche and Volkswagen trace their origins to auto pioneer Ferdinand Porsche, and over the years, both automakers have shared key components like engines, gearboxes and suspensions. For instance, in the late 1930's, the first Porsche sports car used components from the VW Beetle.

Recently, when VW decided to finally enter the sports utility vehicle market with its Touareg in the early 2000s, the company relied on components and designs from Porsche's Cayenne SUV -- and those of the Audi Q -- VW's most upscale brand prior to its Porsche acquisition. Currently, Porsche Cayenne's, Audi SUV's and the Touareg all share a similar chassis design and are manufactured at a VW factory in Bratislava.

The $5.6 billion purchase of a 50.1% stake in Porsche by VW ends what's often been a bitter relationship between the two European automakers. In the mid-2000s, Porsche began buying up shares in Volkswagen in a takeover attempt that escalated in 2008 then the sports car-maker took control of nearly 75% of VW's stock.

Porsche's share purchases caused a short squeeze in VW stock in October 2008, which briefly made it the largest automaker in the world by market cap; however, shares subsequently tumbled when Porsche was barred from taking control of the company. In the aftermath, Porsche was hurt by lawsuits and nearly 10 billion euros in acquisition related debt. In 2009, both companies agreed to a merger, which is not on the verge of being completed after VW's Wednesday stake purchase.

Volkswagen expects to consolidate Porsche's finances by Aug 1 and said that the sports car maker will be worth more than 20 billion euros, in a valuation that will create a non-cash accounting gain of more than 9 billion euros for its existing stake in the company. As part of the deal, VW said the merger will create 320 million euros in new synergies, adding to an initial forecast of roughly $1 billion in added annual operating profits. VW will also contribute financing to cash-strapped Porsche's operations.

"The unique Porsche brand will now become an integral part of the Volkswagen Group. That is good for Volkswagen, good for Porsche and good for Germany as an industrial location. Combining their operating business will make Volkswagen and Porsche even stronger - both financially and strategically - going forward," said Dr.Martin Winterkorn, chairman of Volkswagen, in a statement. The deal comes after the automaker found a structure that could shave off 1 billion euros in taxes. After its completion, Porsche SE will be the largest VW shareholder with 50.7% stake in the auto giant.

Morgan Stanley analyst Stuart Pearson said VW is getting a good deal, in a research note to clients that forecast a 6% earnings per share gain to VW after the merger. Recently, Porsche reported that its sales rose nearly 20% on a more than doubling of Boxter sales. With VW, Pearson also noted that Porsche will have access to added production capacity, potentially alleviating one of the company's biggest operational challenges. Bloomberg reports that VW makes more cars in a single day than Porsche does in a year.
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