It’s not all love and roses between VW and Porsche, Who will be the controlling entity? Options

[Richard Casto]

I just saw this interesting news item...

http://online.wsj.com/article/BT-CO-20090503-702820.html

We all know Porsche bought heavy into VW recently. But now Porsche is carrying a good bit of debt that they have to service. There has been some speculation that VW may try a reverse acquisition of Porsche. I find it interesting that Ferdinand Piech is involved. For those of you who don’t know the history, Ferdinand Piech was in a senior management position (engineering and racing) at Porsche with his eyes on eventually running the company. Ferry Porsche and his sister, Louise Piech decided that the next generation of the Porsche family was not the right group to run the company, so they basically restructured the company so that no family members would be directly running it. Rather they would have a supervisory board made up of Porsche and Piech family members and non-family senior management.

This effectively ended the careers at Porsche for Ferdinand Piech and Ferdinand “Butzi” Porsche (the other potential heir to the Porsche throne). Neither would be allowed to run the company. Butzi left Porsche to start “Porsche Design” and Piech left to join Audi and eventually run VW. Ferdinand Piech retired from the VW board in 2002, but remains as the chairman of the Supervisory Board and still has considerable influence at both VW and Porsche. Ferdinand is pushing for VW to take over Porsche. I wonder if at 72 years of age he is still trying to achieve his goal of rising to the top in the Porsche family hierarchy and control the company.

[Richard Casto]

The soap opera continues...

http://www.bloomberg.com/apps/news?pid=206...id=aUfkV4Slo908

While Porsche technically should control 51% of VW, Lower Saxony (state within German) controls 20% and by a law that is commonly known as the “Volkswagon law”, Lower Saxony has a say in major decisions (such as a merger). Porsche had been counting on two things. First that Lower Saxony would allow the merger (either directly or by removal of the law) and second that they would use VWs cash reserves to pay off the 9 billion euro in debt that Porsche took on to buy all of the VW stock.

But that hasn’t worked out and that leaves Porsche with a bunch of VW stock and a huge loan that they can’t pay off. Porsche had a near death experience recently as it struggled to deal with the debt. The apparently came very close to bankruptcy. To remain solvent, Porsche had to borrow from whoever would loan money to them. Porsche had not made many friends in the banking industry when they manipulated VW stock (as part of the take over plan), so they have been having a hard time getting money. However VW did step up and loan Porsche some cash, but that also gave VW a strong hand with respect to future bargaining with Porsche.

Basically Porsche is between a rock and a hard place. With VW now having a strong position, they are pressuring Porsche to reach a deal. They are now going public with the pressure and Porsche is not happy about it. And the proposals are favorable to VW. Porsche is continuing to trying to find external funding (they have talked to the government of Qatar, the German government and some say even Daimler) so that they can improve their position prior to final negotiations. But so far they are not able to find the funding.