Losing Control of Porsche

Kok Chee Kheong spins a tale on a takeover attempt that went awry

 

For the petrol-heads, I'm afraid that you'll be disappointed. Despite the title, this article is not about how Jeremy Clarkson and his cohorts of intrepid car testers wrecked a Porsche during a test session for Top Gear.

 

Instead, it is a story about how a takeover bid went awry and may ultimately result in the Porsche family losing control of the luxury sports-car manufacturer.

 

 

DRAMATIS PERSONAE

 

Family Ties

It is a well-known fact that the origins of the Volkswagen beetle can be traced back to Adolf Hitler's vision to build a "people's car". Equally well-known is the fact that the car was designed by Dr Ferdinand Porsche.

 

A more obscure fact is that Ferdinand Piech is the grandson of Dr Ferdinand Porsche. Born from the union between Dr Porsche's daughter Louise and Anton Piech, Ferdinand Piech is very much part of the Porsche family even though he does not bear its illustrious name.

 

 

Three Porsches

Three Porsche companies are featured in this article. The first is Dr. Ing. h.c.F. Porsche AG ("Porsche AG") which was founded in 1931. As a result of a reorganization carried out in 2007, Porsche Automobil Holding SE ("Porsche SE") emerged as a holding company with Porsche AG as its wholly-owned subsidiary. The latter retained control of the car manufacturing business.

 

Although the company is listed on the Frankfurt Stock Exchange, all the ordinary shares in Porsche SE were held by the Porsche and Piech families, with the former holding a slightly greater number of such shares than the latter. Porsche SE was also the entity through which shares and share options in Volkswagen AG ("VW") were to be acquired.

 

The third Porsche company is Porsche Holding GmbH ("Porsche Austria"), a private company owned entirely by the Porsche and Piech clans. Porsche Austria is one of the largest motorcar distributors in Europe, particularly in Austria and the former Eastern bloc countries. The marques it distributed included Porsche, Volkswagen, Audi, Seat, Skoda, Bentley and Lamborghini.

 

 

Volkswagen

VW was founded in 1937. The raison d'etre of VW was to manufacture the "people's car". Production commenced shortly before the outbreak of World War II and was disrupted by the war. Production resumed after the war ended. VW became the largest car manufacturer in Europe in 1985.

 

It acquired the Audi marque in 1965 and took control of the Spanish car manufacturer SEAT in 1990. In the following year, it acquired 31% of Skoda, the Czechoslovakian car maker.

 

After spells with Porsche and Audi, Ferdinand Piech joined VW as Chief Executive Officer and Chairman of the management board in 1993. He relinquished both positions to become the Chairman of VW's supervisory board in 2002.

 

Under Piech's leadership, VW moved into the luxury car market with the acquisition of Bentley, Lamborghini and Bugatti in 1998. He had for many years advocated that VW acquires Porsche.

 

 

All Hail the King

Wenderlin Weideking became the chief executive officer of Porsche AG in 1992. Weideking modernised the car manufacturer's production techniques and revived the iconic 911 model which his predecessors had decided to discontinue as a design which had outlived its time.

 

Under Weideking's leadership, Porsche was transformed from a struggling car manufacturer to one of the most admired and profitable car manufacturers in the world. In the course of doing so, Weideking became the highest paid chief executive in the auto-industry, with earnings of €80 million in 2008.

 

Weideking was clearly not just another CEO but a uber-CEO. Perhaps he was destined to extend his reign over Europe's largest car manufacturer.

 

The plan to take control of VW was the brainchild of Holger Haerter, the Chief Financial Officer of Porsche AG, and Weideking.

 

 

THE DRAMA UNFOLDS

 

The Initial Skirmish

On 25 September 2005, Porsche AG announced that it would acquire about 20% of VW. The rationale for this move was to safeguard Porsche AG's future by ensuring that VW, which was both an important technical partner and major component supplier, would not fall into hostile hands.

 

According to Porsche AG, this move was necessary in view of the impending ruling by the European Court of Justice as to the validity of the Volkswagen Law.

 

 

The Volkswagen Law

VW's main operations are based in the State of Lower Saxony. The State Government owns about 20% of the ordinary shares of VW. To safeguard the interest of the State, a law was enacted in 1960 which came to be known as the Volkswagen Law.

 

Three aspects of this law are relevant. First, it limits the voting rights of any investor to 20% even if that investor holds a higher percentage of voting shares in VW. Second, it entitled the German Federal Government and the State of Lower Saxony to appoint 2 representatives each to the supervisory board of VW so long as they held more than one share.

 

Third, contrary to the German Stock Corporation Act which sets a 25% minority vote to block certain resolutions at shareholders' meetings, the Volkswagen Law reduced this blocking majority to 20%, thereby giving the State of Lower Saxony veto powers.

 

 

Raising the Stakes

On 30 April 2007 Porsche AG submitted a mandatory offer for the remaining shares in VW when its shareholding exceeded the 30% threshold. As the offer price was set at the minimum price prescribed by law, it received acceptances for less than 1% of all VW shares.

 

Having completed a mandatory offer, further acquisitions of VW shares would not trigger any obligation by Porsche AG to make further mandatory offers to the remaining shareholders of VW.

 

On 23 October 2007, the European Court of Justice ruled against all three aspects of the Volkswagen Law described above, holding that those provisions were incompatible with various laws of the European Union. The path seemed clear for Porsche SE to seize control of VW.

 

Porsche SE announced on 3 March 2008 that its supervisory board had authorised it to increase its stake in VW to more than 50%.

 

This was an audacious move as VW was about fifteen times larger than Porsche AG in terms of turnover based on their respective preceding financial periods.

 

The blitzkrieg continued. Six months later, Porsche SE announced that it held 42.6% of VW ordinary shares and an additional 31.5% options that upon settlement would enable it to hold 74.1% of the ordinary shares in VW. At the same time, the company declared its intention to raise its holding to 75% in 2009 if "economic framework conditions are suitable".

 

In Porsche SE's 2007/08 Annual Report, Weideking said, "The goal is clear: Porsche intends to acquire the majority shareholding in the Volkswagen Group, thereby creating a clear ownership structure."

 

The 75% shareholding threshold would enable Porsche SE to secure VW's shareholders approval to enter into a "domination agreement" whereby Porsche SE, as the dominating entity, could issue legally binding directives to the management board of VW, the dominated corporation, on the management of the business and affairs of VW.

 

Like cars that receive cosmetic up-grades midway through their production life, the Volkswagen Law was amended on 11 December 2008, with the lower blocking majority of 20% being retained. Porsche SE announced that it would lobby for the abolition of this law which would enable the State of Lower Saxony to thwart its plans to conclude a domination agreement with VW.

 

By 5 January 2009, Porsche SE had increased its stake in VW to 50.76%. What had started as a defensive measure to prevent a hostile takeover of its main technical partner and component supplier had evolved over 3 years into a plan to seize control of VW. Or had this been Weideking's master plan all along?

 

 

RUNNING OUT OF GAS

By the end of 2008, the contagion of the US sub-prime mortgage crisis had affected financial markets worldwide. Credit lines had practically seized and global demand for luxury goods, including sports-cars, had fallen drastically.

 

As Porsche SE had borrowed in excess of €10 billion to finance its acquisition of VW shares and options, frozen credit lines and falling revenues had driven Porsche SE into a massive financial crisis by May 2009.

 

In an about turn, Porsche SE announced that it would abort its takeover plans and pursue a merger with VW through the creation of an integrated car manufacturing group that would include Porsche and all the marques owned by VW.

 

Porsche SE's financial position became more desperate when Kreditanstalt fur Wiederaufbau (KfW), a State-run bank, rejected its application for a €1.75 billion loan. Ironically, it was thrown a lifeline by VW which granted it a €700 million loan.

 

To further ease its cashflow problems, Porsche SE approached Qatar Holding LLC ("Qatar Holding"), a sovereign wealth fund of the Emirate of Qatar, to acquire a stake in the company or its options for VW shares.

 

The tide of the battle had turned. Although he was on the verge of achieving his long held ambition of bringing the Porsche marque into VW fold, Ferdinand Piech refused to use VW automotive division's cash reserves of €13.5 billion to acquire a debt-ridden company. Instead, he demanded that Porsche SE reduces its €9 billion debt as a condition for merger talks.

 

 

THE SURRENDER

On 23 July 2009, Porsche SE terminated the services of Weideking and Haerter, who received €50 million and €12 million respectively as compensation. The dismissal of the architects of the failed scheme signalled the capitulation of Porsche SE and ended the 17-year reign of the "King".

 

On 13 August 2009, VW and Porsche SE announced that their supervisory boards had approved an agreement to create an integrated automotive group.

 

According to the VW press release, the merger would entail the following:

 

(1) The sale by Porsche SE of its options over VW shares to Qatar Holding;

 

(2) The requirement for Porsche SE to obtain the approval of its creditor banks for the reorganisation and to negotiate new financing terms with them;

 

(3) Subject to the satisfactory conclusion of steps (1) and (2), the acquisition by VW of 42% of Porsche AG for approximately €3.3 billion (the stake was subsequently raised to 49.9% and the consideration to €3.9 billion);

 

(4) The sale by the Porsche and Piech families of Porsche Austria's car distribution business to VW for €3.55 billion in 2011 upon terms that the sellers would use the bulk of the sale proceeds to subscribe for new Porsche SE shares to improve the company's financial stability;

 

(5) Following the completion of the above steps, Porsche SE and VW will be merged in 2011.

 

According to Spiegel Online, the Piech and Porsche families will hold more than 50% of the ordinary shares in VW upon completion of the merger. The State of Lower Saxony will retain its 20% shares while Qatar Holding will hold between 14.9% to 19.9% of the merged entity.

 

On the day after the announcement of the agreement, Porsche SE issued 10% of its ordinary shares and sold the majority of its VW options to Qatar Holding. According to its press release, the transactions would improve the liquidity of Porsche SE.

 

Step (2) was successfully concluded and detailed implementation agreements for the merger were agreed upon by all parties on 20 November 2009. On 7 December 2009, step (3) of the merger was implemented when VW completed its acquisition of 49.9% stake in Porsche SE.

 

 

THE ROAD AHEAD

With the completion of the acquisition of 49.9% of Porsche SE, it is likely that the full merger will be realised unless market conditions in a global economy which remains fragile renders it impracticable to do so.

 

Will Porsche be allowed to operate as an independent entity and continue turning out its much desired sports-cars under the control of VW? There is no reason why it cannot as VW's record in this respect speaks for itself. Audi, Bentley, Bugatti and Lamborghini have each succeeded in producing highly desirable and well-regarded sports-cars under the aegis of VW.

 

If the merger is completed as planned, VW will move into the driving seat of the car manufacturing and distribution businesses which have remained in the hands of the Porsche and Piech families for more than half a century.

 

 

KOK CHEE KHEONG ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 
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