After a very brief courtship ,Fiat and Chrysler announced earlier this year that they had reached a deal under which Fiat will acquire 35% Stake in Chrysler, the ailing U.S. automaker.It would seem at first sight that this may mark the end of Chrysler's troubles, but it is not so.Under the deal Fiat is not bringing in any money into Chrysler. In return for its stake in Chrysler it will just supply its latest fuel efficient technology to it.Fiat plans to convert a couple of Chrysler's U.S. factories to producing Fiat's small and medium sized vehicles. It's dealers worldwide will also sell Chrysler cars besides its own vehicles. In theory at least this should be a big plus for Chrysler which has a limited presence in overseas markets. Fiat argues that this will not only strengthen Chrysler's product range which is presently loaded in favor of trucks and SUV's, but also increase its global sales.
This marriage seems to have the blessings of the Obama administration,most probably because there are no other suitors for Chrysler. As a gift the government will give billions in fresh loans to Chrysler.It has also persuaded its major creditors to write down the value of their loans and accept about 29 cents to the dollar instead of trying to recover more by auctionong off the whole company.This has cleared the way for a sale in which Chrysler will be divided into two, with the good parts going to Fiat and the unviable parts being sold off.
The only question that now needs to be answered is, will it work? Fiat's exposure to the U.S. market and U.S. automakers is not new. It licensed its first plant in the U.S. in 1910 and its cars fetched a premium. This plant was shut down when theU.S. joined World War II in 1917. Later it again entered the U.S. market but withdrew in 1989, facing complaints over quality and competition from Japanese vehicles.GM acquired a stake in Fiat in 2000 with an option to purchase the entire company. In case GM chose not to buy out Fiat it had to pay a penalty of $2 billion! GM chose to pay the penalty and dissolved the agreement with Fiat in May 2005. Now Fiat is saddled with a car company that is constantly losing market share. Fiat seems to think that it is in a win-win situation as it is not paying cash for Chrysler and is only bringing in technology,besides spending time managing it. But car companies all over the world are losing money and closing plants.Fiat's introduction of a low volume niche product in the U.S., even if successful against Japanese and other American cars, is unlikely to make much of a difference to Chrysler's fortunes. Unless a miracle happens the marriage will last only as long as the U.S. government is willing to fund Chrysler.
Monday, May 11, 2009
Sunday, May 10, 2009
What The Bank Stress Test Conceals!
In order to restore public confidence in the health of the U.S. banking system,the Fed decided to put nineteen of the biggest banks,each with assets of over $100 billion, through a 'stress test.' Since these banks together form about 65% of the U.S. banking system, it was felt that maintaining their health was of utmost importance in order to protect the entire banking system.Though the idea was conceived way back in September of last year it was implemented now.
The Fed's anxiety is reflected in the way this test was conducted.Discussions with the banks resulted in a more lenient test than originally planned and the results were 'leaked' a few days in advance. The official results showed that nine banks passed the test and would not need to raise any additional capital.The remaining ten banks would need to raise about $75 billion of additional capital which is lower than expected.
Even before the results were announced banks had announced their first quarter results for this fiscal which beat street estimates.But the real picture is not as rosy as it appears at first sight.Banks at the moment have borrowing costs which are close to zero.Additionally, due to changes in mark-to-market accounting rules by the FASB they are managing to avoid making write downs in the values of their loan portfolios.This also allows lower provisioning for future loan losses. Make no mistake, such losses are going to be substantial.Residential housing prices have still to hit bottom and the meltdown in commercial real estate prices has just begun. Rising unemployment is bound to increase credit card delinquencies.
Although banks are finding it very profitable to make new loans as the cost of borrowing is virtually zero, the stress test is silent about as to how these banks will go about repairing their damaged balance sheets. The visible options are that either the banks will raise more capital from private investors or the government will convert preferred shares into common stock. In all probability some mixture of the two alternatives will be pursued though it will dilute the value of the stocks held by present investors. Finally the test tells nothing about how the banking system is going to rid itself of the 'toxic assets' that continue to haunt these banks.All in all the banks continue to be weak and a lot of uncertainty still lies ahead.
The Fed's anxiety is reflected in the way this test was conducted.Discussions with the banks resulted in a more lenient test than originally planned and the results were 'leaked' a few days in advance. The official results showed that nine banks passed the test and would not need to raise any additional capital.The remaining ten banks would need to raise about $75 billion of additional capital which is lower than expected.
Even before the results were announced banks had announced their first quarter results for this fiscal which beat street estimates.But the real picture is not as rosy as it appears at first sight.Banks at the moment have borrowing costs which are close to zero.Additionally, due to changes in mark-to-market accounting rules by the FASB they are managing to avoid making write downs in the values of their loan portfolios.This also allows lower provisioning for future loan losses. Make no mistake, such losses are going to be substantial.Residential housing prices have still to hit bottom and the meltdown in commercial real estate prices has just begun. Rising unemployment is bound to increase credit card delinquencies.
Although banks are finding it very profitable to make new loans as the cost of borrowing is virtually zero, the stress test is silent about as to how these banks will go about repairing their damaged balance sheets. The visible options are that either the banks will raise more capital from private investors or the government will convert preferred shares into common stock. In all probability some mixture of the two alternatives will be pursued though it will dilute the value of the stocks held by present investors. Finally the test tells nothing about how the banking system is going to rid itself of the 'toxic assets' that continue to haunt these banks.All in all the banks continue to be weak and a lot of uncertainty still lies ahead.
Saturday, May 9, 2009
'Porsche'-Auto Company Or Hedge Fund?
Thorsten Jacobs,a car industry analyst described Porsche as 'an investment bank with a car showroom attached.' Maybe with good reason.Under Holger Harter, its finance director,Porsche has been making more money from financial market operations than from selling cars,for the last several years.
It was Ferdinand Porsche, the founder of Porsche who had designed the Volkswagen Beetle,before setting up his own company which bears his name till this day.
So why was Porsche dabbling in stocks instead of concentrating on selling cars? Its long term goal has been to acquire VW,a company almost fifteen times its own size! Using cash-settled options Harter ensured that Porsche had cornered almost 75% of VW shares by October 2008. Strangely market speculators could never guess Porsche's interest in VW. The credit crunch had hit the auto industry very hard and auto shares all over the world were in freefall. VW shares defied logic and refused to budge. Hedge fund managers, sensing a killing, short sold VW shares in huge quantities.They reasoned that that it could not be long before VW shares also started sliding, following the likes of GM and Toyota. But this did not happen. The reason behind this was revealed on 26th October 2008 when Porsche announced that it controlled almost 75% of all VW shares.Hell broke loose on the trading floors on Monday,and by Tuesday VW shares crossed the 1000 euro mark as short sellers, caught on the wrong foot, desperately tried to cover their positions. In the process, VW now valued at 287 billion euros, briefly became the world's most valuable company.
Hedge funds, hit with losses of almost 30 billion euros, cried foul, prompting an investigation by the German regulator BaFin. Porsche on its part denied any wrongdoing. 'It is the funds themselves that are responsible, with their huge bets on a fall in VW shares that never happened,' a Porsche spokesman said. Porsche further offered to help hedge funds settle their loss making short positions on VW by offering to unwind some of its own positions.
In January this year Porsche announced that it had taken over VW by purchasing more than 50% of its shares. Thereafter in March, Germany's financial regulator BaFin halted its probe into Porsche regarding a possible manipulation in VW shares.'We didn't find any indications for a share manipulation,' said a spokesperson. Now on Wednesday after several weeks of talks, Porsche and VW have announced plans to merge, in the process creating a German car giant and one of the world's largest auto companies.
It was Ferdinand Porsche, the founder of Porsche who had designed the Volkswagen Beetle,before setting up his own company which bears his name till this day.
So why was Porsche dabbling in stocks instead of concentrating on selling cars? Its long term goal has been to acquire VW,a company almost fifteen times its own size! Using cash-settled options Harter ensured that Porsche had cornered almost 75% of VW shares by October 2008. Strangely market speculators could never guess Porsche's interest in VW. The credit crunch had hit the auto industry very hard and auto shares all over the world were in freefall. VW shares defied logic and refused to budge. Hedge fund managers, sensing a killing, short sold VW shares in huge quantities.They reasoned that that it could not be long before VW shares also started sliding, following the likes of GM and Toyota. But this did not happen. The reason behind this was revealed on 26th October 2008 when Porsche announced that it controlled almost 75% of all VW shares.Hell broke loose on the trading floors on Monday,and by Tuesday VW shares crossed the 1000 euro mark as short sellers, caught on the wrong foot, desperately tried to cover their positions. In the process, VW now valued at 287 billion euros, briefly became the world's most valuable company.
Hedge funds, hit with losses of almost 30 billion euros, cried foul, prompting an investigation by the German regulator BaFin. Porsche on its part denied any wrongdoing. 'It is the funds themselves that are responsible, with their huge bets on a fall in VW shares that never happened,' a Porsche spokesman said. Porsche further offered to help hedge funds settle their loss making short positions on VW by offering to unwind some of its own positions.
In January this year Porsche announced that it had taken over VW by purchasing more than 50% of its shares. Thereafter in March, Germany's financial regulator BaFin halted its probe into Porsche regarding a possible manipulation in VW shares.'We didn't find any indications for a share manipulation,' said a spokesperson. Now on Wednesday after several weeks of talks, Porsche and VW have announced plans to merge, in the process creating a German car giant and one of the world's largest auto companies.
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