Boeing And Volkswagen Enter Deals With Uncertain Payoffs

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Following a contentious Senate hearing last month and reports of imminent criminal charges, Boeing is making news for something positive: the planned acquisition of Spirit AeroSystems. The all-stock deal purchases the manufacturer for $4.7 billion. The total transaction value, which includes debt, is $8.3 billion.

This isn’t a quick ploy to distract the public, even though the timing—when there is a lot that Boeing would like people to forget about—is fortuitous. Boeing first announced in March that it was working toward an acquisition of Spirit, which the company said at the time “would further strengthen aviation safety [and] improve quality”—two areas that Boeing has needed to work on in light of a door plug blow out on an Alaska Airlines jet earlier this year, and legal repercussions from two fatal plane crashes that killed a total of 346 people in 2018 and 2019.

Spirit AeroSystems had actually been part of Boeing up until 2005. At the time, Boeing saw itself as a company that would be the integrator of parts made by different manufacturers. As Boeing spun off what became Spirit nearly 20 years ago, Forbes senior contributor Marisa Garcia writes, some industry watchers warned that the move might actually deplete expertise that had grown and matured at Boeing, leaving the airplane manufacturer with holes in its technical ability. Forbes contributor Jerrold Lundquist writes that the initial spinoff wasn’t necessarily a bad idea, but it required more attention and direct oversight on the part of Boeing to be a success.

Forbes senior editor Jeremy Bogaisky writes that the merger is unlikely to solve any of the problems that either company is facing. The two companies have diverged in their management and practices in the last 19 years, and the contract with Spirit’s machinists union may complicate things. Spirit’s largest weakness, Bogaisky reports, is likely the large number of assembly line workers who didn’t return after initial shutdowns during the early days of the Covid-19—just 20% to 30% of all aerospace industry workers came back.

It’s an expensive move for a company that has seen its public reputation—and cash—dwindling this year. The deal gave both Boeing and Spirit AeroSystems’ stock a slight bump after it was announced on Monday. The rest, it seems, may be up to Boeing keeping that promise of strengthened aviation safety.

ECONOMIC INDICATORS

Inflation is slowly decreasing, but it’s not yet to the point in which the Federal Reserve is likely to cut interest rates. The personal consumption expenditures index, which is the Fed’s favored inflation metric, was at 2.6% in May, which is the lowest level since March 2021. This figure is moving down slowly—it was 2.7% in April—but still quite a ways off from the Fed’s long-term inflation target of 2%.

While there has been broad hope that interest rate cuts will happen in the coming months, Fed governor Michelle Bowman said last week that she doesn’t expect lower rates until “future years.” At a question-and-answer session at London think tank Policy Exchange, Bowman said, “I remain willing to raise” rates “should progress on inflation stall or even reverse.” Bowman is considered one of the more hawkish members of the board, but as progress on inflation reduction has slowed, predictions of rate cuts this year have also been slashed.

Sticky inflation is also keeping the consumer confidence level down. Figures released last week by the Conference Board show that elevated prices for food and groceries continue to have a negative impact on how people see the economy, causing their consumer confidence score to dip to 100.4 from 101.3 in May. Their expectation index—based on short-term outlooks on income, business and labor market conditions—is also down this month compared to May. This index has been at a level below 80, which often signals a coming recession, for five months. (According to S&P Global figures, there’s a 25% to 30% chance of a recession in the next 12 months—more than regular times, but it is not imminent.)

However, Forbes senior contributor Erik Sherman writes, economists and policymakers tend to miss this impact on regular consumers because they’re in a bubble of research and relative financial comfort. Median wage growth hasn’t been keeping pace with inflation, and prices aren’t all coming down as a result of inflation easing its grip. Looking at the economic situation more from an ordinary person’s perspective may help policymakers better understand how Americans are actually thinking about the economy.

LEGAL ISSUES

Using administrative law judges in the Securities and Exchange Commission to rule on questions of securities fraud violates a person’s constitutional right to a trial by jury, the Supreme Court ruled last week. It means disputes need to go before regular judges and juries—not the administrative courts that often exact deeper penalties.

Elon Musk and Mark Cuban urged the court to rule against the SEC, writing in a court brief administrative law judges “raise serious concerns” and “results in unequal results for SEC defendants, an erosion of trust in public institutions, and a limitation on the availability of valuable information for the market.” The current system, they said, gives the SEC too much power and gives the perception that the agency has an “unfair advantage” in its legal challenges, believing that resolving disputes through a jury trial would be more fair.

While the ruling is relatively narrow, it could bring big changes for administrative law judges in other federal departments. In 2017, there were 1,931 administrative law judges throughout the federal government in departments including the SEC, the Social Security Administration, the National Labor Relations Board or the Occupational Health and Safety Administration.

POLICY + REGULATIONS

Official rules detailing the new 1% excise tax on corporate stock buybacks are set to be published in the Federal Register this week, writes Forbes senior writer Kelly Phillips Erb. This new tax, which was part of the Inflation Reduction Act of 2022, ends the practice of allowing companies to be able to realize shareholder-style capital gains benefits from the sale. Instead, all share buybacks by publicly traded companies will be taxed at the corporate level, with no other taxes—or incentives—for dividends. The Joint Committee on Taxation estimates this tax will raise $74 billion in its first 10 years. The regulations introduce a new reporting form and set the first deadline for reporting corporate stock buybacks in fiscal years after Dec. 31, 2022: Oct. 31.

DEEP DIVE

Volkswagen Is Investing Up To $5 Billion In Rivian

What goes into a good investment? As a deal last week between Volkswagen and Rivian shows, it depends on your perspective.

Electric vehicle maker Rivian announced the deal with the German automaker last week, in which Volkswagen will invest up to $5 billion in Rivian through 2026. It starts with an initial $1 billion investment, as well as a new joint venture between the two companies to develop an automotive software platform based on Rivian’s technology. The platform will bring Rivian’s “zonal” hardware design and focus on functions including integrating infotainment, wireless connectivity and autonomous driving functions, Volkswagen Group CEO Oliver Blume said. The remaining $4 billion will come as the joint venture reaches certain technical milestones.

Industry watchers hailed the deal as an important one for both Volkswagen and Rivian. The electric car maker had been struggling with high costs—Rivian’s gross loss per vehicle in the first quarter was $39,000, Forbes senior contributor Peter Cohan writes—and had to pause construction of a new factory.

Meanwhile, Volkswagen had lofty electric vehicle goals. In 2021, it pledged to make 100% of its revenues from battery-operated vehicles by 2040, and increase revenue from mobility services and software. It’s since stepped back considerably, as the traditional automaker has had issues producing electric vehicles people will buy. Additionally, Volkwagen’s internal software group, known as Cariad, imploded last year, replacing most of its C-suite and board, and laying off 2,000 workers in a restructuring move.

The Volkswagen-Rivian deal brings each automaker something that the other one needs, but what do investors think? Rivian has seen its stock spike, with prices up more than 25% since the deal was announced. Volkswagen, on the other hand, has seen its stock drop slightly. Analysts say investors are concerned about the high price tag for this investment and are not sure if it will pay off.

FACTS + COMMENTS

Pharmacy giant Walgreens saw its worst day on the stock market in more than 50 years last week following an earnings report that missed expectations and the announcement of store closings.

$2.80 to $2.95: Revision of net earnings per share for the fiscal year. Previously, the expected EPS was $3.20 to $3.35

2,000+: Number of Walgreens stores that could close—about 25% of its total

‘We continue to face a difficult operating environment’: CEO Tim Wentworth said

STRATEGIES + ADVICE

The SEC’s new disclosure rule for cybersecurity incidents has brought CFOs and CISOs together for reporting. Here are some of the things learned so far from this process.

Business partnerships are important, but can be difficult. Here are some tips to make your partnerships stronger and more productive.

VIDEO

QUIZ

Meme stock king Keith Gill—also known as “Roaring Kitty”—drove a roller coaster rise and drop of which company’s stock by announcing he had a sizable stake?

A. Blackberry

B. Chewy

C. Birkenstock

D. Under Armour

See if you got the answer right here.