Porsche Takeover of VW Done But For The Law

Porsche AG took step closer to controlling the much larger Volkswagen AG by upping its share holdings to 50.8% in late Monday trading.

But actual formal control of management still eludes the company. Porsche plans to raise its stake in VW to more than 75% this year, with which it expects to gain total control over the Volkswagen Group, which includes Audi, Bentley, Seat, Skoda and Lamborghini. Having more than 75% of shares would allow it to seal a so-called “domination contract” giving it full financial control.

In Germany, a minority investor that owns 25% of a company’s shares can block strategic decisions of the company. But in the case of VW, the level is set at 20% by special law that dates back to the 1940s when the state of Lower Saxony, where VW is based, was granted a 20% interest. Porsche has challenged the so-called VW law and has received support from the European Commission. But the German government hasn’t yet revised the law to Porsche’s benefit.

Porsche has been on a quest to takeover VW for more than two years. And so far it has paid off well. In Porsche’s last annual reporting year, it booked only about one-billion euros in operating profit. But it reported 6.39 billion euros in net income, with the boost coming primarily from the increased value of its VW investment.

As Porsche advances its strategy, it is truly the case of the goldfish swallowing the whale. Porsche turns out roughly 100,000 expensive sportscars and sport utility vehicles a year, while Volkswagen churns out about five million vehicles annually.

Behind the combination of the companies is Ferdinand Piech, the grandson of Porsche AG founder Ferdinand Porsche, who was also famous for the design of the Volkswagen Beetle. The Piech and Porsche families control the voting stock of Porsche, though no family member has been allowed to run the company in the last four decades. Instead, Piech rose through the ranks at VW, first running Audi AG and then VW AG. Today, he is chairman of the supervisory board of VW AG, a role he has been able to keep because German securities laws do not recognize his dual role as a conflict of interest the way the laws might in the U.S.

On Tuesday, the long drawn out combination of the two companies may have created a suicide. Stock traders have tried to maximize their own profits by shadowing Porsche’s moves. Adolf Merckle, one of Germany’s wealthiest businessmen, threw himself in front a train this week, a move reported in the German press to have been prompted by hundreds of millions of euros of losses in risky VW share trading and the rapid crumbling of his pharmaceuticals empire. The 74 year old was head of a conglomerate, which included the Ratiopharm drugs group and HeidelbergCement.

Meantime, Volkswagens ambitious plans to expand its business three fold in the U.S. have been derailed by the Recession and free-falling industry sales. Still, VW managed to report some good news when 2008 sales were tallied January 5. Volkswagen, helped by the Wolfsburg, Germany-based carmaker’s luxury Audi brand, increased its share of U.S. car sales to 2.8 percent in December from 2.1 percent a year earlier. Audi’s 9.3 percent dip and the VW brand’s 14 percent drop were smaller drops than most of its competitors. VW brand sales slipped 3.2 percent for the year, compared with a market-wide drop of 18 percent.

VW in the last year has added a new Jetta model, as well as a new diesel version of that car, as well as the Touran minivan, Tiguan SUV and CC sports sedan (pictured above). “There is a sense of buzz and energy coming back into the VW brand, and it has benefited from the comeback of passenger car sales,” says independent marketing consultant Dennis Keene.

Indeed, passenger cars outsold SUVs in 2008 for the first time since 2000.

To buttress its expansion plans, Volkswagen is building a $1 billion factory in Tennessee, its first in the U.S. since 1988, in a bid to end five years of losses in the country and triple sales to 1 million by 2018.

VW needs U.S. production so it can avoid losing so much money when it converts its costs in euros and other currencies to a weakened dollar. Few people believe the company can hit its ambitious sales goal. But it may be fun to watch it try.

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