Monday, March 03, 2008

Porsche AG Board Approves Purchases of Majority Stake of VW

By Chris Haak


As we have reported earlier here, Porsche has been steadily increasing its ownership stake in Volkswagen AG. Porsche currently owns about 31% of VW, making Porsche the largest shareholder of VW. The German state of Lower Saxony (where VW is headquartered) owns about 20% of the company in its role as its second-largest shareholder. Porsche has not added to its ownership stake in nearly a year, since we last reported on this subject.

Today's Wall Street Journal reports that holding company's management board has authorized Porsche management to take the steps needed to gain regulatory approval to purchase the remaining 20% of Volkswagen shares necessary to hold a majority stake in Europe's largest automaker (jumping from 31% to 51% holdings). Porsche was quick to point out that "it is not planned to merge the two companies."

As I said last year, this would be interesting. A year ago, Porsche stated that if the "VW law" (which prevented a single investor from taking more than a 20% stake in the company's stock) were repealed, it would not be compelled to acquire so much of Volkswagen. Porsche's originally stated rationale for purchasing shares of VW was to protect VW from a foreign takeover. Well, last year, the European Court of Justice ruled against the law. Additionally, Porsche plus Lower Saxony combined already own a majority of Volkswagen shares, so any potential foreign takeover could already be averted pretty easily.

So then, why is Porsche still buying - or interested in buying - ever larger portions of Volkswagen? I can see at least obvious reasons on the face of this.

First, there is VW Chairman (and large Porsche shareholder) Ferdinand Piëch's ego. If he's trying to become the next great titan of the German automobile industry, along the lines of what his grandfather (the designer of the original VW Beetle) and uncle (the founder of Porsche) were able to do.

The second possibility is that it's purely a financial decision. Porsche, while obviously famous for its incredible sports cars, has also proven over the past several years to be a bottom line-focused company, alternately either selling out on its pure sports car values to sell "sporty SUVs," or bragging about being the most profitable automaker in the world (apparently on a per-unit basis, as Toyota's relentless assault of good financial news makes one believe that in absolute terms, Toyota is making more money than Porsche). VW shares closed at €94.23 on February 28, 2007 and have since climbed nearly 60% in the ensuing year, to €149.99 on February 29, 2007. Volkswagen has about 300 million shares outstanding, so 31% of that is about 93 million shares. The value of 93 million shares of VW has increased by almost €5.2 billion in the past year. Additionally, the "alliance" with VW (as Porsche management is spinning the purchase) could easily yield benefits such as spreading purchasing economies over a larger vehicle count.

Lastly, the third possibility is that Porsche is buying VW as a hedge against future carbon emission/fuel economy regulation. Clearly, a relatively small manufacturer of expensive, high performance vehicles has a larger carbon footprint per vehicle than a full-line manufacturer that also builds small vehicles, city cars, diesels, etc. If sales of Porsche's own lineup were ever jeopardized by legislation, I'm sure that the company could quickly combine operations with VW and claim credit for the overall efficiency of VW's fleet, where Porsche's niche status would be just a drop in the bucket for a company aspiring to be the world's largest automaker within the next dozen years. Of course, Porsche would likely also pursue litigation and a public relations campaign against any such legislation, as it has begun to do with the extreme congestion charges slated to begin in London at the end of this year, and which affect Porsche owners adversely.

As we said a year ago, this will be interesting, and we may actually gain a better understanding of Porsche's and Piëch's motivations for these moves within the next year or so. Stay tuned!

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