Holy Shit...Porsche buys 20% of Volkswagen

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By MARK LANDLER / New York Times

Published: September 27, 2005

 

FRANKFURT, Sept. 26 - The chief executive of Porsche, Wendelin Wiedeking, said two weeks ago at the Frankfurt Motor Show that his company had two options for growth: sell more sports cars, which would mean competing on price, or try to break into the broader luxury market, building on the success of its Cayenne sport utility vehicle.

 

On Sunday, Porsche added a third option: buy into Europe's largest mass-market carmaker, Volkswagen.

 

Porsche's surprise announcement that it planned to amass 20 percent of Volkswagen is reverberating through the German auto industry, challenging assumptions about Porsche and reviving complaints about the clubby nature of corporate Germany.

 

On Monday, shares of Porsche plunged more than 10 percent, their steepest drop in two and a half years. Several analysts lowered their ratings on the stock and warned that marrying the maker of the 911 Turbo with the maker of the Beetle would inevitably tarnish Porsche.

 

"There's hardly any business rationale for this deal," said Arndt Ellinghorst, an analyst at Dresdner Kleinwort Wasserstein in Frankfurt. "It really dilutes the image of Porsche, and raises questions about whether the management has control over the capital of the company."

 

Porsche said it was making the investment to head off a potential hostile takeover of Volkswagen, securing its long-term ties to an important partner. For now, Volkswagen is shielded from takeovers by a German law, but that statute is being challenged in a European court.

 

The investment could cost upward of 3 billion euros ($3.6 billion), based on the market value of Volkswagen's stock, which barely moved on Monday. Porsche insists it can finance the deal internally and still pay for other projects, like a sports coupe, the Panamera, which it plans to introduce in 2009.

 

Porsche has the fattest profit margins in the auto industry, so few analysts doubt it has the financial muscle. They worry, though, that Volkswagen, which is struggling on several fronts, could end up as a costly distraction for Porsche's executives. Porsche attributes much of its success in the last decade to keeping a focus on its high-performance cars.

 

"Porsche is the exception that proves the rule: no other car company of its size has had a chance on its own," said Garel Rhys, director of the Center for Automotive Industry Research at Cardiff University in Wales. "The question is, Will Porsche continue to serve as an R.& D. laboratory for the auto industry or will it disappear into Volkswagen?"

 

Porsche is not the first German luxury carmaker to buy into a mass-market rival. The precedents are not encouraging.

 

Daimler-Benz merged with the Chrysler Corporation in 1998 and soon found itself struggling with financial problems at the American company. Daimler's executives were so distracted, analysts say, that they neglected the company's flagship Mercedes division, which suffered a precipitous decline in quality standards and profit, even as Chrysler bounced back.

 

In 1994, BMW bought Rover of Britain, seeking to break out of its luxury niche. It spent billions of dollars and lavished management attention on the money-losing company before bailing out six years later.

 

"BMW is a bigger company than Porsche, and Rover is a smaller company than Volkswagen," Mr. Rhys said, "and even then it diverted too many strategic resources from BMW."

 

Porsche already works closely with Volkswagen; the Cayenne is partly built at a Volkswagen plant in Slovakia, and the two have agreed to the joint development of hybrid gasoline-electric engines.

 

Moreover, Porsche and Volkswagen share common parentage. Ferdinand Porsche, the Austrian engineer who designed the Beetle to fulfill Hitler's request for a people's car, also laid the groundwork for a sports car. His son Ferdinand, known as Ferry, later started Porsche.

 

Ferdinand Piëch, a grandson of the elder Mr. Porsche, is a former chief executive and current board chairman of Volkswagen, as well as a board member of Porsche. The Porsche and Piëch families own half the shares of Porsche, and all the voting rights.

 

"It's a very wealthy clan, and this was a long-planned coup for them to take over part of Volkswagen," said Ferdinand Dudenhöffer, director of the Center for Automotive Research in Gelsenkirchen.

 

Porsche has never catered much to the market, analysts say. It refuses to publish financial reports, and it shelved plans to list its shares in New York because it could not abide the disclosure requirements.

 

This latest deal, analysts said, is no different. "For most Porsche shareholders, it's a slap in the face," Mr. Ellinghorst said.

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