Porsche's Risky Ride with VW
By Jack Ewing
Sports-car maker Porsche is known as one of Germany's most successful companies -- and one of the stingiest with information. It reports earnings only every six months, and CEO Wendelin Wiedeking is an outspoken opponent of efforts to compel CEOs to disclose how much money they make. Porsche's publicly traded preferred shares don't confer control over the company because the voting shares belong exclusively to members of the Porsche and Piëch families.
Vote-less shareholders have been willing to live with Porsche's Old World approach to investor relations because the carmaker earns good money -- $153 million on sales of $3.7 billion in the fiscal half-year ended Jan. 31. That was a 6.3% profit increase compared to the year-earlier period at a time when mass-market carmakers such as General Motors (GM ) or DaimlerChrysler (DCX ) are struggling (see BW, 8/15/05, "DaimlerChrysler: Divorce, German Style?"). But Stuttgart-based Porsche's plans to acquire 20% of mass-market carmaker Volkswagen, announced on Sept. 25, might leave some shareholders wondering whether management has blown a gasket.
JUNKETS AND HOOKERS?
For Volkswagen, the benefits are clear -- protection against a hostile takeover. It may also get a lift from Porsche's image and well-regarded management. VW needs the help. With profits of $484 million on sales of $55.4 billion in the first half of calendar 2005, VW's profit margin is less than 1%. In addition, VW's image has been tarnished by accusations, currently under investigation by German prosecutors, that some high-ranking managers and a labor representative took junkets at company expense featuring high-price prostitutes (see BW, 7/25/05, "Volkswagen Brakes For Epic Change").
For Porsche, though, the risks seem more obvious than the potential gains. Yes, the deal guarantees that Porsche can continue to draw on Volkswagen's resources as they jointly develop new technology, such as gasoline-electric hybrid technology.
For example, the acquisition provides security for the joint venture that produces components for Volkswagen's Touareg and Porsche's Cayenne SUVs. But is that enough to justify depleting Porsche's cash pile to the tune of some $3.6 billion? "Until now, Porsche has made all the right decisions," says Martin Sachsenmaier, a fund manager at Frankfurt Trust in Frankfurt, which owns shares in Porsche and VW (and plans to hold them for now). "You have to wonder what's behind this."
The concern is that Porsche is driven more by historic sentiment than financial logic. Both it and Wolfsburg-based Volkswagen trace their ancestry to Ferdinand Porsche, whose engineering studio designed the first VW "people's car." The first Porsche roadsters, credited to Ferdinand's son Ferry Porsche, had an air-cooled motor that was effectively a souped-up Volkswagen engine.
In recent years the Porsche family tie to Volkswagen has been upheld by Ferdinand Piëch, Ferdinand Porsche's grandson, who's chairman of VW's supervisory board.
Family tradition, though, is hardly an argument to spend $3.6 billion. Porsche's investment makes sense only if the company, which will likely get a seat on VW's supervisory board, can contribute to Volkswagen's turnaround and boost the value of the shares. But 20% isn't enough for Porsche to exercise decisive control over Volkswagen.
"IN OUR OWN INTERESTS."
Should Volkswagen's profits continue to slide, Porsche could see its stake lose value fast. (In fact, shares of both companies fell the day after the Sunday announcement.) Added to that is the risk that Porsche's image could suffer from closer association to Volkswagen. "VW faces a lot of struggles at top, and it will take three years to bring it back to a reasonable profit," says a person who works closely with the company.
Finally, there's a risk that Porsche will have trouble buying enough shares to equal 20%. So far it has less than 5%. A Porsche spokesman declined to say how it plans to acquire the rest.
In a statement announcing the planned acquisition, Porsche said it acted to head off a hostile bid for VW in 2007, when the Wolfsburg company will lose the state takeover protection afforded by the so-called Volkswagen Law. "We want to secure the independence of Volkswagen in our own interests," Porsche CEO Wiedeking said in the statement. The concern is that when Wiedeking speaks of "our interests," he's not including shareholders.
Ewing is BusinessWeek's Frankfurt bureau chief