Plans to merge Porsche into the Volkswagen Group has been delayed. The merger has been held up by lawsuits in the US and an investigation by German prosecutors linked to Porsche’s botched effort to buy VW. But why would this delay the merger, and why is Porsche being investigated?
The history between the two companies goes way back. Porsche has always had a close relationship with VW. For example, the first Volkswagen Beetle was designed by Ferdinand Porsche. More collaborations between the two companies resulted in cars like the VW-Porsche 914 and 916, Audi RS2 or the VW Touareg, Audi Q7 and the Porsche Cayenne.
Also interesting is the fact that Porsche is owned by the Piëch and Porsche families. The current chairman and former CEO of the Volkswagen Group is Dr. Ferdinand Karl Piëch. He is a grandson of Ferdinand Porsche and started his career at Porsche before he moved to Audi.
Car maker or hedge fund?
The former CEO of Porsche, Wendelin Wiedekin wanted Porsche to become more than just a niche sports-car company, otherwise the company might not survive another recession. Therefore Porsche would need a larger financial base to developed new technologies and cars. So, in 2005 Porsche began to load up on shares of VW stock. But Volkswagen is protected from hostile takeovers via a law in Germany. This law is known as the VW law and according to this, an 80 percent majority is required to make “significant decisions” at VW board meetings. This percentage is unobtainable because the state government of Lower Saxony, where VW is headquartered, owns 20.1 percent of VW shares.
So Porsche tried to overturn this law and in the mean time, it continued buying up VW shares. This happened quite often in secret (hence the future claim of market manipulation). Out of the blue, Porsche revealed it owned 42.6% of VW stocks and had settled on options for a further 31,5%. The few remaining shares became very popular among short-sellers.
In 2008, Porsche CEO Wiedeking (‘No risk, no fun’ is my motto) became the best paid executive in Germany in 2008, reaping an estimated 80 million euros in salary after profits exceeded revenue thanks to windfall gains from financial instruments linked to VW shares.
In 2009, VW stocks rose from about 210 euros to 1,000 euros after Porsche announced it owned or had positions on 74.1 percent of the stock, making VW the most valuable company in the world. The brief rise — shares quickly fell to 517 euros the next day — squeezed out short-sellers who had been betting on VW shares to fall. Hedge funds were said to have lost 10 billion to 40 billion euros. One billionaire investor committed suicide after losing more than $300 million. Some even suggested that Porsche was “a hedge fund with a carmaker attached”.
But the attempts of taking on a company 15 times the size of Porsche, the Stuttgart based company overstretched itself. The attempt of Porsche to increase its control of the VW Group finally failed, leaving the company with enormous debts more than € 10 billion ($13.8 billion). Porsche CEO Wiedeking was exit. Instead VW, in a ironic fate became interested in buying the highly indebted Porsche.
Later in 2009, Volkswagen and Porsche signed an agreement to create an “integrated automotive group”, led by Volkswagen AG. Therefore VW bought a 49.9% stake in Porsche in December 2009. The merger of Volkswagen AG and Porsche is scheduled to take place during the course of 2011, but according to the news of the last couple of days this did not happen. Why not?
Porsche has faced lawsuits from investors in Germany and the U.S., and investigations into former executives. The claim is that Porsche had manipulated the market. Short sellers of VW stock have sued Porsche in the U.S., claiming the car maker secretly piled up VW shares and later caused the investors to lose more than $1 billion. A lawyer representing one of the 41 claimants in Germany said today the plaintiffs had officially filed a suit seeking 1.1 billion euros in damages.
Porsche denied all wrongdoing. But nevertheless these lawsuits are posing enormous risks which would also could affect VW, especially in a merger. As a result of the news that VW and Porsche delayed their merger, the stocks of Porsche dropped 14 percent. The shares of the company are down 26% this year. This results in a market value of Porsche of 11.7 billion euros. And this the core of the delayed merger, the price of the stocks and market value of both companies are unsure, just as the outcome of the lawsuits against Porsche. Both imposes economic risks.
VW will also look at other ways of creating an integrated car making group. It is expected that the two carmakers will come up with a new agreement before the end of this year.