The motor industry and the financial markets have been transfixed in recent months as Porsche SE, the luxury sports car and utility manufacturer, has continued its move to takeover Volkswagen AG (VW). By early January Porsche had raised its share holding in VW to 50.8% and is expected to push this stake to 75% later this year enabling it to take formal control of the company.
But this is not just another takeover and industrial consolidation story. Porsche’s audacious move has had several astonishing and controversial angles.
First, the story has a ‘David and Goliath’ aspect to it. Porsche makes about 105,000 vehicles each year - a mere handful relative to the circa 6 million made by VW.
Then we have the amazing impact that Porsche’s acquisition has had on the stock markets. In the past two years Porsche has been building up not only its holdings of actual shares in VW but also in options positions which, when exercised, give it the right to further share holdings.
When Porsche announced in October last year that that it either owned, or had the right to, 75% of VW’s shares (with another 20% being owned by the German state of Lower Saxony) VW’s share price rocketed, rising over two trading days from €211 to €918. This made VW, temporarily at least, the most highly valued company in the world.
This staggering increase in price was accentuated by the fact that a number of fund managers had been taking up ‘short-selling’ positions in VW - selling the shares in the expectation that their price would fall in the future. If this had happened the shares would then have been bought back at a profit. But Porsche’s announcement meant that only 5% of VW shares were not controlled by either them or by the state of Lower Saxony, where VW is based.
So confronted by this shortage of available shares the fund managers fought to cover their ‘short’ positions by buying VW shares. But this inevitably drove VW’s share price skywards. This resulted in huge trading losses for the funds that had engaged in short-selling.
Indeed the increase in VW’s share price has been great news for Porsche: in its last financial year it made circa €1 billion in operating profits from vehicle production but overall pre-tax profits were €8.6 billion, due largely to the €6.8 billion rise in the value of its holdings and options positions in VW shares.
There have also been the regulatory controversies associated with the takeover - foremost of these being the fact that the Chairman of VW’s Supervisory Board is Ferdinand Piech, the grandson of Ferdinand Porsche, the founder of the Porsche company! Indeed the Porsche and Piech families have between them control of the voting shares of Porsche - although it has been many years since any family member has run the company. Some observers have questioned whether Ferdinand Piech’s position has given rise to a conflict of interests in respect of the takeover.
Another issue relates to Lower Saxony’s holding in VW. Under German law a shareholder with a holding of 25% or more of a company’s shares can veto its strategic decisions. But for VW the threshold for this power of veto is set at a 20% share holding under a special law passed in the 1940s.
The state of Lower Saxony, with its 20.1% stake, therefore has the right to block VW’s strategic initiatives. Given the lack of flexibility this gives to those running the company, Porsche, in anticipation of the completion of the takeover, is challenging this special law.
Then we have a Swedish angle! Now that Porsche has gained a majority stake it is statutorily obliged to make a takeover offer for the Swedish truck maker Scania, where VW owns 69% of the voting shares. This is unlikely to deter Porsche which will probably only make an offer that will be readily rejected by Scania
It is perhaps ironic that the economic backcloth to the takeover has been one of falling stock markets and plummeting car sales in Europe and elsewhere around the globe. Yet Porsche has made vast sums out of its share holding in VW and is poised to swallow a huge car manufacturer whose empire includes Audi, Bentley, Lamborghini, Seat and Skoda.
Meanwhile the fund managers who have incurred huge losses by betting the wrong way on the price of VW’s shares may find themselves having to trade in their Porsches - perhaps for a VW!
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