Porsche-Volkswagen Fight, Hostile Takeover Attempt & Merger Case Study??

An interesting case study on the Porsche-Volkswagen merger during my M&A and Corporate Restructuring course @ 英国帝国理工学院 .

These carmakers prior to the merger in 2011 were completely different.?

Porsche specialised in sports cars and was recognised as a leading global brand for its consistent quality. One of the central elements of Porsche’s business model was its low manufacturing depth, which means that it did not have huge centralised production plants. Many building processes were outsourced while Porsche concentrated on its core competencies. Porsche was the most profitable company among small carmakers.?

Volkswagen AG was a manufacturer of passenger and commercial vehicles under the brands: Volkswagen, Audi, Skoda, SEAT, Bentley, and Scania. VW's revenue was 15 times higher the Porsche's. However, with its debilitating cost structure and strong unions, its profitability was 7 times lower than Porsche's.?

What were the business and financial relationships between Porsche and Volkswagen prior to 2007?

Prior to 2007, both companies had quite complex business and financial relationships. Key milestones:

• The founder of Porsche played a significant role in designing the Volkswagen Beetle in the 1930s. The two companies had a long-standing connection from their early days.
• In the 1960s, Volkswagen acquired a minority stake in Porsche. Over the years, Volkswagen gradually increased its ownership in Porsche and, by 1972, owned a majority stake in the company. Porsche became a subsidiary of Volkswagen, but it still operated independently.
• In the 1990s, under new leadership, Porsche started acquiring a stake in Volkswagen. Porsche saw potential in Volkswagen's market position and aimed to gain more control over the company.
• In 2005, Porsche acquired a 20% stake in Volkswagen. Over the next couple of years, Porsche increased its stake in Volkswagen to over 30% and became its largest shareholder. Porsche aimed to take full control of Volkswagen and launched a takeover bid in 2007.

How was Porsche involved with VW shares in October 2008? Why? What happened?

• Prior to October 2008, Porsche had been steadily increasing its stake in Volkswagen. By October, Porsche already held around 43% of the VW’s shares.
• Porsche's acquisition strategy and its large stake in Volkswagen caught the attention of investors and speculators. Some investors began to bet against Volkswagen's stock by short-selling it, expecting the price to decline.
• On the 26th of Oct 2008, Porsche announced its intention to increase its stake in Volkswagen to over 75% and eventually acquire full control. This surprise announcement caused a massive surge in Volkswagen's stock price.
• As VW's stock price skyrocketed, those who short-sold the stock faced significant losses.
• The rapid increase in Volkswagen's stock price created immense volatility and had a widespread impact on the financial markets. The surge in VW's market capitalisation briefly made it the most valuable company in the world, surpassing even larger companies like ExxonMobil or Apple.
• This series of events in October 2008 had far-reaching consequences for both companies. The stock price volatility, regulatory investigations (German and EU’s), and financial strain caused by high Porsche’s indebtedness eventually led to Volkswagen acquiring Porsche in a reverse takeover in 2012.

What did Porsche gain from it? What are the pros and cons?

Pros of the Porsche-Volkswagen merger:

1. The merger led to cost savings through economies of scale and operational efficiencies. Both companies could benefit from shared research and development efforts, purchasing power, and manufacturing capabilities.
2. The merger created a more diversified automotive group. Porsche's expertise in luxury and high-performance vehicles complemented VW's broader range of brands and vehicle segments.?
3. Long term, the merger provided financial stability and a stronger balance sheet for both companies. By integrating their operations and sharing costs, the combined entity could improve profitability and stand economic downturns more effectively.

Cons of the Porsche-Volkswagen merger:

1. In the second half of 2009, Porsche’s net income dropped by 83%.
2. The tension was created by putting the competing brands of Audi, Bentley, Porsche, Bugatti, and Lamborghini under the same, corporate umbrella. Porsche's unique brand identity has been diluted to some extent.
3. A newly created company is more debt-ridden. The merger required substantial financial investments and raised concerns about debt and liquidity.
4. VW’s leadership took over Porsche rather than the other way around (as Porsche was the world’s most profitable, small carmaker before).

Who are the losers?

Some of the stakeholders who may have been perceived as losers in the merger:

• Some of Porsche’s shareholders might have felt disadvantaged by the merger.?
• Some of Porsche's management and employees.
• Some of the suppliers.
• Competitors and regulators.

What could VW have done to prevent it?

In my opinion:

• Volkswagen could have taken actions to prevent Porsche from accumulating an ownership position (e.g. by issuing new shares, seeking alternative investors, etc).
• VW could have focused on strengthening its balance sheet and improving profitability, which could have made it more challenging for Porsche to execute its takeover plans.
• Volkswagen could have sought strategic partnerships or alliances with other automakers to strengthen its market position.

Waiting for a movie to be released about this merger??.

Marek Niedzwiedz