Tables Turn in Porsche’s Pursuit of VW
By CARTER DOUGHERTY June 20, 2009 - NYT

FRANKFURT — When Wolfgang Porsche learned that his family’s sports car company would need an emergency cash infusion from its giant rival Volkswagen, he “went absolutely white.” “It was as though he’d heard someone died,” said one person briefed on the secret meeting between executives of the two companies. The meeting, at the offices of the governor of Lower Saxony state, where Volkswagen is based, effectively ended the company’s audacious bid for Europe’s largest automaker. It also was the beginning of the end of Porsche’s cherished independence. A day after the meeting, on March 23, fax machines around Germany spit out papers for Volkswagen’s board members to sign: an emergency loan of 700 million euros from Volkswagen, about $950 million at the time.

“This is becoming a reverse takeover on a financial level,” said Arndt Ellinghorst, head of automotive research at Credit Suisse in London. “Porsche has debt and VW has the luxury of cash.” Even amid the tumult that is the car industry these days, the story of Porsche and its overreaching ruling family is a singular drama. Its denouement was most likely prompted by Porsche’s taking out billions of euros in loans to acquire the last portion of Volkswagen that it did not own, enlarging its debt load at precisely the moment capital markets froze up. At heart, though, the role reversal — where Porsche turned from Volkswagen’s predator to its prey — is the latest scene in a family saga. “In the end, this is about clans,” said Stefan Bratzel, head of the automotive research center at the University of Applied Sciences and Economics in Bergisch-Gladbach, near Cologne. “It is the Porsche clan versus the Piëch clan who belong to a single familial line, but maybe that makes the conflict that much harder.”

Both families descended from Ferdinand Porsche, who created the Volkswagen Beetle in the 1930s. After World War II, Ferdinand’s son Ferry set up his own company, which became Porsche. Meanwhile, Ferdinand’s daughter Louise married Anton Piëch, a Viennese lawyer; their son, Ferdinand Piëch, is now chairman of Volkswagen and has a seat on Porsche’s board. In the early 1980s, the Porsche and Piëch clans beat back an effort by an errant cousin, Ernst Piëch, to sell his shares to a Kuwaiti investor. Instead, the Porsches bought him out, which allowed Wolfgang Porsche’s eventual appointment as chairman years later. Four years ago, Porsche acquired a 20 percent stake in Volkswagen. Porsche’s chief executive, Wendelin Wiedeking, called the move defensive, and said that it was aimed at protecting one of his company’s most important partners from a hostile takeover. But as time passed, it became clear that Porsche wanted full control of VW, so that the tiny car maker could share the costs of developing new technologies with the much larger VW.

That reflected a conviction, recently articulated by Sergio Marchionne, the chief executive of Fiat, that only automakers that command economies of scale will survive in the global economy. In October, Porsche began an epic “short-squeeze” by announcing it had acquired shares and options equal to nearly 75 percent of Volkswagen’s stock. That forced hedge funds and traders who had sold the shares short — a process that involves lending them out — to buy them back at astronomical prices. For a brief period, VW was the world’s most valuable company. But, in retrospect, Porsche appears to have scored a pyrrhic victory. Getting the last 8 to 10 percent of Volkswagen may have been what broke Porsche, according to a person familiar with its finances, who requested anonymity because it involved confidential data. Porsche appears to have paid about 6 billion euros for that batch of stock, enlarging its debt load at precisely the moment that capital markets turned reluctant to lend money.

Now Wolfgang Porsche is having to accept Porsche’s integration into Volkswagen, rather than the hoped-for David-versus-Goliath takeover. And Porsche is seeking a loan from the German government and a cash infusion — from Arab investors. The company has started exclusive talks with the Qatar Investment Authority, the country’s sovereign wealth fund. The fund could acquire up to 25 percent of Porsche’s voting shares, which have long kept the Porsche family in charge. The Qataris, who would get a seat on Porsche’s supervisory board, may also purchase the options Porsche has on VW shares. Qatar could bring up to 5 billion euros ($6.9 billion) to the company, analysts estimate, helping to relieve the 9 billion euro debt load that Porsche incurred to acquire 50.76 percent of Volkswagen. To tide it over, Porsche has applied for a 1.75 billion euro loan from a fund the German government set up in March to help companies weather the financial crisis. The request is being reviewed in Berlin, with a response expected in days or weeks.

But even a Qatari investment or a loan from the government will not revive Porsche’s VW project, analysts said. “That scenario does not exist anymore,” said Daniel Schwarz, an automotive analyst at Commerzbank in Frankfurt. On May 6, Porsche and Volkswagen set a four-week deadline to create an “integrated” auto concern, but the deadline came and went amid some very public sniping from Mr. Piëch. The conflict centers on whether a fusion would simply make Porsche the 10th brand within the sprawling VW empire, or whether it would be a merger of equals. An alpha male who is known to create fear among his underlings, Mr. Piëch has made clear that the goal was to reel in Porsche on VW’s terms.

In mid-May at the unveiling of a new version of VW’s Polo, a small hatchback, Mr. Piëch publicly criticized Mr. Wiedeking and Holger Härter, the chief financial officer who masterminded cornering VW stock. The men were partly responsible for Porsche’s precarious financial position, Mr. Piëch said, and VW’s cash would come with strings attached. The statement stunned Porsche shareholders. Analysts say it is likely Volkswagen will now push harder to seize control of Porsche. “German law clearly says you cannot say things publicly that violate the overriding general interest of the company,” said Christian Strenger, a board member of DWS Investment, one of Germany’s largest fund managers.
“But Mr. Piëch apparently wishes to put Porsche on the ropes.”