David buys Goliath

By Andres D'Alessandro

I have to say. I am a little bit amazed. I never thought that company with 7 billion euros in sales a year could possible takeover a company with 105 billion euros in sales a year. But it appears that I made the biggest mistake of all, because that is exactly what is happening. Porsche (the sports car maker and probably the smallest independent car company in the world, that still has some importance in the market) now owns about 31% of Volkswagen AG. Volkswagen is known for the Beetle, Jetta and Passat, and it is also the biggest car company in Europe, as well as fourth in the World.

Now you might think that 31% is not exactly ownership. And you would be correct in thinking. But you see in Germany there is a law called the VW Law. This special law basically states that no shareholder, no matter how much of the company he owns, can have more than 20% of the votes. This was created because the German State of Lower Saxony is the second major stockholder in VW and to protect the company from takeovers. This law also states that should a company accumulate 30% of the shares in VW, he must therefore make a tender offer for the remaining 70%. Which is precisely what Porsche has done. Of course they offered a lowball offer of just over €100 a share. Which no one will take, give that the current share price is €115 and rising.

Now you might ask yourself. Why would Porsche, the most profitable car company in the world (yes, even more profitable than Toyota), would want to buy a company that has been losing billions for years. (It actually did turn a profit last year). Well, this is where my explanation divides itself. I am going to try to explain to my best understanding

Reason 1
VW is Porsche’s biggest business partner and in order to insure the future of this highly lucrative business relationship Porsche has become the major stockholder in VW. There is some truth in this argument. I mean, they are currently working on a hybrid engine. But then again Porsche is also working with Toyota on this. So that argument is rather weak. They also developed the framework for the Cayenne, Touraeg and Q7 together, so that works well. This is what they said. I think they are just beating around the bush. See Porsche is a growing company and in the not-so-faraway future, they are going to have capacity shortages and VW has a lot of overcapacity… So that is very complimentary. But I think goes deeper than that. When you think about it, in global term Porsche is a very small company. And it is standing there all alone. Not like Ferrari, which is part of FIAT, or Lamborghini, which is part of VW. The cost of developing new technologies and new cars is becoming increasingly high and it will come to a point where Porsche just cant do it alone anymore. I mean how big can it actually get….. It already made €1.1 billion on a little over €7 billion in sales last year. That is a huge profit margin for a car company. So in that sense, in buying company like VW, it is actually taking out an insurance policy on its future. So that it can remain “independent”.

Reason 2
This is my favourite reason. Porsche is owned by the Porsche/Piech Family. They hold about 50% of the equity and all of the voting rights. The Chairman of the Supervisory Board of VW is Dr. Ferdinand Piech, which just so happens to be the second largest individual shareholder of Porsche holding 12.9%. Isn’t that an amazing coincidence???!?!?! Oh wait, but there's more. You see Porsche was started by Dr. Piech’s grandfather, the ever so famous Dr. Ferdinand Porsche. And in a certain way, Dr. Porsche was the founder of VW, I mean, he designed the first VW, the Beetle. Funny how things kind of turn out……. Still not quite done yet, you see the Porsche/Piech Family owns two companies called Porsche. One is the Porsche, AG, which produces those wonderful sports cars, and Porsche Holding, GmbH, which operates Europe’s largest network of car dealerships. Now which car brand do you think it might represents????? I’ll give you a hint, it ain’t Porsche….. No no no, they sell VW. You see they are VW’s largest distributor in the whole world.


So I would like to leave you with a question. How funny would it be, if one of the largest car companies in the world was a family owned/controlled company? And this would be one tough competitor. If they managed to do with VW what they have done with Porsche, we could easily be seeing a real competitor for Toyota.

Comment and replies are welcomed and appreciated.