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Volkswagen's $256 Million Investment Adds $600 Million To Navistar's Market Cap

Navistar International Corporation NYSE:NAV, VOLKSWAGEN A G SPONS VLKAY - Volkswagen's $256 Million Investment Adds $600 Million To Navistar's Market Cap

Shares of Navistar International Corp NAV 4.8% skyrocketed 40.6 percent on Tuesday after the company announced a strategic deal with Volkswagen Truck & Bus. Volkswagen AG (ADR) VLKAY 1.36% is reportedly taking a $256 million stake in Navistar, and the two companies plan on collaborating on strategic technology.

The market certainly seemed to like the deal and sent the stock soaring to new 2016 highs. However, the move may have been a bit too much too soon for the stock. The deal with Volkswagen was worth $256 million, or about $3.13 per Navistar share. Navistar jumped as much as $9.38/share in early Tuesday trading before settling down to close up $5.72/share.

The Whys

Why is the market valuing this deal so much more than its worth? There will certainly be future cost savings and synergies associated with the deal, which could justify a bit more than $3.13/share in valuation. However, $5–9 per share still seems a bit unreasonable.

Related Link: Navistar Hits Highest Level In Over A Year: Is There More Room To Run?

One of the most likely explanations is that at least part of the huge jump in share price has little to do with the value of the deal and much more to do with the fact that Navistar reportedly had a 23 percent short float and 12 days to cover based on average daily volume.

The deal sent shorts scrambling to cover, and the resulting short squeeze shot shares much higher than they would have gone based on the value of the deal alone. This short squeeze would also explain why the stock shot above $23 per share in early trading only to close back down below $20.

With the stock still priced more than $5 above its close prior to the deal’s announcement, it may still have a bit farther to pull back following the huge squeeze.

At time of writing, ADRs of Volkswagen were up 1.29 percent on Wednesday, trading at $29.90, while Navistar was down 5 percent on the day at $18.80. Navistar's market cap currently sits at $2.13 billion.

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