June 19, 2009 - VW & Porsche, Frankfurt Germany

VW Moves In for Kill on Porsche

When Wolfgang Porsche learned that his family’s sports-car maker, once bent on taking over Volkswagen, now had to beg its giant rival for money, he looked as if he were going to faint.

Europe Feels the Strain of Protecting Workers and Plants

A worker checks a new Porsche Panamera at a plant in Leipzig, Germany.

When Wolfgang Porsche learned that his family’s sports-car maker, once bent on taking over Volkswagen, now had to beg its giant rival for money, he looked as if he were going to faint.

“He went absolutely white,” said one person briefed on that secret meeting, which involved executives from both companies. “It was as though he’d heard someone died.”

A day later, on March 23, fax machines around Germany spit out a piece of paper for Volkswagen’s board members to sign: an emergency loan of €700 million, or $977 million, for Porsche from its former prey — Volkswagen.

The meeting at the office of the governor of Lower Saxony state, where Volkswagen is based, effectively ended Porsche’s audacious bid to become the largest automaker in Europe. And the consequences of the Porsche family’s overreaching go further as its car making business, while still profitable, faces the end of its cherished independence.

Mr. Porsche is now on the verge of accepting Porsche’s integration into Volkswagen, rather than the hoped-for David-versus-Goliath takeover. On top of that embarrassment, Porsche also is seeking outside investors and a government bailout.

“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.”

Porsche said Friday its nine-month profit dropped 15 percent to €4.6 billion, excluding its holdings of Volkswagen, as the global economic crisis drove down demand for new cars, The Associated Press reported from Berlin.

The sports car maker has entered exclusive talks with the Qatar Investment Authority, the sovereign wealth fund of the energy-rich Persian Gulf emirate. It could acquire as much as 25 percent of Porsche’s voting shares, which have long kept the Porsche family firmly 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 as much as €5 billion into the company, analysts estimate, helping to relieve the €9 billion debt load that Porsche incurred to acquire 50.76 percent of Volkswagen.

To tide it over, Porsche has applied for a loan of €1.75 billion from a fund the German government set up in March to help companies through the financial crisis. The request is being reviewed in Berlin, with a response expected in the coming days or weeks.

The surprising turnabout is the latest in a history of squabbles between the Porsche and Piëch clans — both descended from Ferdinand Porsche, who created the Volkswagen Beetle in the 1930s.

After World War II, Ferdinand Porsche’s son, Ferry, set up his own company, which became Porsche. Mr. Porsche’s daughter Louise married Anton Piëch, a Viennese lawyer; their son, Ferdinand, is now chairman of Volkswagen and sits on Porsche’s board.

“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.”

In the early 1980s, the Porsche and Piëch clans beat back an attempt by an errant cousin, Ernst Piëch, to sell his shares to a Kuwaiti investor. Instead, the Porsches bought him out, ensuring Wolfgang Porsche’s 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, 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 so the tiny car maker could share the costs of developing new technologies with much-larger Volkswagen. That reflected a conviction, recently articulated by Sergio Marchionne, the chief executive of Fiat, that only automakers that command major economies of scale would survive in the global economy.

In October, Porsche set off an epic “short-squeeze” by announcing that it had 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. The Porsche finance chief, Holger Härter, was a minor legend, the German who had beaten London and New York traders at their own game. But, in retrospect, Porsche appears to have scored a Pyrrhic victory.

Getting the last 8 percent to 10 percent of Volkswagen it bought may have been what broke Porsche, according to a person familiar with its finances, who requested anonymity because the subject involved confidential data. Porsche appears to have paid about €6 billion for that segment of stock, enlarging its debt just when capital markets turned reluctant to lend money anew.

The result is that even a Qatari investment, or a loan from the government, cannot revitalize the project for taking full control of VW, analysts said. “This does not create a chance for Porsche to resume the takeover of VW,” said Daniel Schwarz, an automotive analyst at Commerzbank in Frankfurt. “That scenario does not exist anymore.”

On May 6, Porsche and Volkswagen set a four-week deadline for creating an “integrated” auto concern, but the deadline came and went amid some very public sniping from Ferdinand Piëch. The conflict centers on whether a fusion would simply make Porsche the 10th brand within the sprawling VW empire, or whether it would have a merger-of-equals quality.

Mr. Piëch has long been something of a black sheep in the family as well. He left an engineering job at Porsche to pursue a career at Volkswagen. A legendary alpha male who is known to arouse fear among his underlings, Mr. Piëch has made it clear that the goal is to reel Porsche in on VW’s terms.

In mid-May at the unveiling of a new version of the VW Polo, a small hatchback, Mr. Piëch publicly badmouthed both Mr. Wiedeking and Mr. Härter. They were partly responsible for the sports-car maker’s precarious financial position, he said, and cash-rich VW would not bail them out with no strings attached.

The statement stunned Porsche shareholders, but Mr. Piëch has made it clear that his interests lie primarily with Volkswagen, which analysts say is likely to push harder now 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 Investments, one of Germany’s largest fund managers. “But Mr. Piëch apparently wishes to put Porsche on the ropes.”

Original Story - New York Times

Additional Story - June 28, 2009

Porsche and VW Remain Far Apart in Deal Talks

No one ever said combining Porsche and Volkswagen would be easy. But nearly a month after an initial deadline for setting the outlines of the deal, the two German automakers sound no closer than when they started.

Volkswagen, according to a report Saturday in the newsweekly Der Spiegel, gave Porsche an ultimatum to decide by Monday whether to accept the merger on VW’s terms or risk having the deal fall apart. Der Spiegel did not cite a source for its information.

Porsche, maker of sports cars and luxury S.U.V.’s, and Volkswagen, the largest European carmaker, said on May 6 that they would work to create “an integrated automotive group” and that they hoped to sketch out the structure of the deal by June 3. The target date was missed, however, after Volkswagen demanded that Porsche explain its troubled finances more clearly before talks went ahead.

The state of Lower Saxony owns 20 percent of VW, and authorities in Qatar have been negotiating to provide financing to help Porsche handle its crippling debt. The article in Der Spiegel suggested that Lower Saxony and Qatar had sided with VW in calling on Porsche to rein in its expectations and come to an agreement.

Porsche, which had been hoping to acquire Volkswagen outright until its ambitions outran its finances, is seeking at least 50 percent of the merged company. Porsche’s chairman, Wolfgang Porsche, and his deputy, Uwe Hück, reacted with a sharp statement Saturday saying they were “deeply concerned and irritated” by the reported ultimatum from VW. “We will not give in to such pressure or blackmail,” they added, and they questioned VW’s commitment to reaching a deal.

Christine Ritz, a Volkswagen spokeswoman, declined Sunday to comment on the state of negotiations.

“What I can tell you,” she said of the report, “is that we are not aware of any letter or deadline. It’s very strange.” Both Ms. Ritz and Frank Gaube, a Porsche spokesman, said the two companies were continuing to work toward a merger.

Rival branches of the same family control the two companies, with the Porsches holding Porsche and the Piëch family in charge of VW. The VW chairman, Ferdinand K. Piëch, a member of the Porsche family, holds a seat on the Porsche board.

Under the deal VW offered Porsche, Der Spiegel reported, the Porsche and Piëch families would together hold 40 percent of the combined company. Lower Saxony (where Volkswagen has its headquarters) would maintain its 20 percent holding, while Qatar would take 15 percent. An unidentified sovereign wealth fund would hold the remaining 5 percent; the remainder would presumably be listed on the stock market.

Porsche took on a debt of 9 billion euros, or $12.7 billion, as it acquired its VW stake over the last four years. It acquired about 51 percent of VW’s shares outright and used so-called cash-settled options contracts to gain voting rights to at least 20 percent more. With overtures to the government for financial help not progressing, Porsche has become reliant on short-term financing, including a 700 million euro loan from VW in March.

VW may decide to demand payment of that loan in September, when it comes due, Der Spiegel said, a move that would turn up the pressure on Porsche to make a deal.

As a first step to a merger, Volkswagen has proposed that Porsche sell it a 49 percent in its sports car business for 3 billion to 4 billion euros, Der Spiegel reported. The Qatari fund would then buy the VW options from Porsche.

Porsche had reached out to Qatar for financing to solve its debt problem, but Der Spiegel said the sovereign fund now wanted to be part of the merger, rather than Porsche’s savior. Patrick Donovan, a spokesman for the Qatari fund, declined to comment.

Mr. Gaube of Porsche said his company was talking with Qatar after the fund finished its due diligence of the company “with a positive outcome and we are moving forward.”

Update June 29, 2009

Porsche Rejects VW Offer

Porsche has rejected an offer by Volkswagen AG to take a 49 percent stake in the sports car maker, a company spokesman said Monday.

Porsche Automobil Holding SE spokesman Albrecht Bamler said the offer by VW ''is not a viable option.''

Debt-laden Porsche, based in Stuttgart, has been holding talks with a Qatar state investment fund on a possible investment.

Porsche confirmed earlier this month that it is in exclusive talks with the Qatar Investment Authority -- the primary investment vehicle of the small, energy-rich state.

Bamler said that, for VW to take a stake in Porsche, the Wolfsburg-based automaker would have to take out credit worth 10.75 billion euro ($15.15 billion).

Porsche holds a roughly 51 percent stake in Volkswagen, but ran up hefty debts in accumulating that holding and is now seeking a merger with the larger company. Exactly how that is to happen remains unclear.