“We Are Not Doing A Hostile Takeover”, Your Friendly Partner, Porsche AG
In the wake of the US financial crisis, one of the most stunning games of corporate-coup chess was playing out its final stages in Germany.
This is about the highly unusual story of Porsche’s run on Volkswagen. This is about David secretly running a corporate takeover of Goliath. One of the most amazing things is that in this event, Porsche’s run briefly made Volkswagen the world’s most valuable company . There are enough twists and knots and turns in this story that it’s hard to know which thread to pick up first when unwinding it.
The events have been retold many times and many people are well aware of the story . Porsche, The Hedge Fund That Also Made Cars by Priceonomics is an especially good account. The WSJ also had spot on foreshadowing of the power struggle that was about to come. I will retell this story here, and I will also go into some my additional observations, because I think this story is one of the most questionable and masterful financial deceptions of recent history.
Short Squeezed
On the 28th of October 2008, short traders had discovered they had been cornered and beaten into a pulp by Porsche, in one of financial history’s largest ever squeezes. The short trader’s losses were estimated anywhere between €7 and €15 billion.
According to a Reuters article, on October 25th, as much as 12.8% of Volkswagen’s market capitalisation was on loan, meaning borrowed by short-sellers. That’s not a minor amount by any means.
If you’re not familiar with short-selling, it is also known as Sell High Buy Low, the mirrored sister of the Buy Low Sell High adage. Traders borrow a stock at a high value, and sell it to someone else, hoping to later purchase it at a lower price to settle their account and keep the difference as profit.
Porsche declared owning 42.6% of Volkswagen outright with an additional 31.5% available in cash-settled stock options, and intended to increase Porsche’s holding to 75% of Volkswagen in 2009, which would trigger execution rights over VW. With another 20% locked up in the Government of Lower Saxony, there simply weren’t enough shares around to cover the 12.8% in shares on loan, leading to massive price appreciation for VW’s stock.
The short-sellers had entered their transaction on a mistaken belief that the contracted world market conditions (see: the massive global recession) combined with a highly over-valued Volkswagen would surely lead to lower prices for the stock. Short sellers didn’t see Porsche’s corner coming because as recently as March of 2018, Porsche stated they were definitely not seeking a takeover of VW in any way.
Porsche had indeed long publicly stated that their interest in VW was only in protecting Porsche’s own sales, German nationalism, and preventing a foreign takeover.
A Conflict Of Interest
At that time in 2005, when Porsche bought 20% of VW and became VW’s single largest shareholder, many cried foul. As the Chairman of Volkswagen was none other than Ferdinand Karl Piëch, the grandson descendent of Ferdinand Porsche, Piëch owned 10% of Porsche. Many worried about this being an abuse of German Crony Capitalism that had plagued post-war Germany, helping wealthy families consolidate power. Even the Economist called Porsche out for making a cosy family deal. The Premier of Lower Saxony, Christian Wulff, tried to replace Ferdinand due to the conflict.
“Germany’s voluntary corporate-governance code, published in May 2003, is clear. “Material conflicts of interest and those which are not merely temporary” should result in the termination of a supervisory board member’s mandate, it says. But VW officials and Mr Piëch claim that the conflict can be managed by the simple expedient of his leaving the room when commercially sensitive issues between Porsche and VW are discussed. Some regard this as just a little naive.”
As the Priceonomics article astutely uncovers, not only had Ferdinand Karl Piëch, the Chairmain of Volkswagen, been born with a 10% stake in Porsche, he had also been Director of Engineering for the Porsche company and previously in line to become CEO of Porsche. Due to family feuds, this never came to fruition, and in 1975 Ferdinand Karl joined Audio as Head of Technical Development. Eventually Ferdinand became CEO of and Chairmain of Volkswagen in 1993.
As Chairman of Volkswagen, and a board member of Porsche, Ferdinand would be privy to all of Porsche’s manoeuvring. From his position, Ferdinand would have a head start to avoid a takeover attempt from Porsche if he wanted, but he would also directly profit from demand for Volkswagen shares as he was presumably awarded a stake as compensation. Although the details of this Volkswagen ownership is not public, we can assume that in his decade plus at VW and by managing their turnaround, this would be a significant sum of money, albeit dwarfed by Ferdinand’s stake in Porsche.
Porsche Runs Out of Cash
To understand the ridiculousness of Porsche’s power play, you have to understand Porsche’s financials relative to VW. In 2008, VW saw a €113 billion revenue with a €4 billion net profit. And in the mid 2008 year end for Porsche’s fiscal year, even before the October 2008 short-squeeze, Porsche saw €7.4 billion in revenue, with €8.5 billion in profit. Financing operations exceeded revenue!!! This was the tail lucratively wagging the dog, for two companies whose history and future had long been intertwined. After all it was also Ferdinand Porsche who designed Hitler’s Volkswagen, which helped to start the Volkswagen Group.
So now in the fall of 2008, it appears that Porsche is about to successfully takeover Volkswagen, a company with over ten times Porsche’s revenue. Even though Porsche’s CEO had been stating the opposite intent for years, the people who had cried foul were proven right. This CEO, Wendelin Wiedeking, is being hailed around the world as a financial mastermind who just made one of the shrewdest moves in finance history.
Porsche had just one small problem. Actually two. And they weren’t very small problems.
The first problem was the Volkswagen Rule, which provided the government owned portion of Volkswagen strong veto powers, combined with the government’s unwillingness to sell Volkswagen to Porsche. Although the VW Rule had been named illegal by EU courts in 2007 due to anti-protectionist EU regulations, German lawmakers discovered workarounds. The Chancellor of Lower Saxony sitting on the board of VW, Wulff, had long opposed the takeover. And Wulff convinced Merkel to veto a repeal of the rule. This required Porsche to acquire not only 75% of Volkswagen in 2009, but a total of 80% to overcome Wulff’s veto.
The second problem was that Porsche had run up huge loans in opening their position on Volkswagen, among rocketing prices for the stock. Porsche had now amassed €13 billion loans, in a global environment where an economic crash was running its course, and banks started calling in their loans. Wiedeking said he had been caught by surprise by “draconian banks” in the fall of 2008. It’s unclear how, given the dramatic reversal in the policy of the Fed in the spring of 2008. On the other hand, if Porsche could complete their takeover, they would gain access to €12 billion in cash reserves from VW. But nobody wanted to lend Porsche the capital to get there.
Porsche applied for bailout loans that the German government was providing, but Germany didn’t bite. Porsche then went abroad and sought financing from Qatar. They had a deal on the table and almost ready to go when Wulff and Merkel stepped in once again to block it. Porsche had almost negotiated a deal until Wulff stepped in to block it, with Merkel at his side. The Qatar investors agreed to make the deal, but only once the VW-Porsche transaction settled out. The twist? Ferdinand Piëch, chairman of VW, joined Merkel and Wulff in asking Qatar to to divert the funds to VW instead of Porsche, Piëch going over Wiedeking’s head.
The Knife Twist
With no more cash, Porsche was in a very dire situation. The Chairmain of Volkswagen, Ferdinand Piëch, and 10% owner in Porsche, prosposed an emergency €1 loan from Volkswagen to Porsche conditional on Volkswagen buying Porsche. Volkswagen and Porsche would merge into one company, and Porsche would be subsumed into Volkswagen. Porsche (and by ownership the Porsche-Piëch clan) would own greater than a 52% ownership in VW, Lower Saxony would retain their 20% stake, and Qatar would pay off the debts for a 17% stake in the resulting company. This would give Ferdinand Piëch authority over Porsche.
What choice did Volkswagen have anyway? With a 50%e ownership in VW, Porsche and by proxy their huge stake in VW was at risk. If Porsche sold off VW shares to cover their losses, it would tank VW shareholder value.
The Lawsuits
From this saga a number of lawsuits resulted, only one successful so far.
The regional court in Stuttgart, where Porsche is based, has received 80 lawsuits targeting Porsche and VW, Germany’s Stuttgarter Zeitung reported earlier on Tuesday, citing a spokeswoman at the court.
Hedge funds shorting VW sued Porsche for €1.5 billion for misleading short-sellers, which the courts dismissed in 2015. Short sellers felt cheated because they were blind-sighted by Porsche’s option position, which Porsche had no obligation to report under European regulations. Similar lawsuits against Porsche also failed in the US, where Porsche was sued for €5 billion.
Not only that, investors in Porsche similarly sued Porsche for improperly managing the failed takeover, and improperly disclosing the risk of their manoeuvres. Keep in mind that although Porsche has been 100% family owned, there were preferential shares with economic value but non-controlling interest that belonged to institutional investors.
The successful lawsuit? Porsche CFO Härter paid €630,000 euros for a credit fraud conviction related to incorrect statements to BNP, after failing appeal.
The Timeline
Taken from AutoNews and Reuters
2005
September
Porsche says it controls 10.3% of VW group; plans to buy 20%
Late 2005
Porsche reveals that it has made profits of €3.6 billion on VW stock option purchases
2006
June
Porsche raises its VW stake by 3.9% to 25.1%. Finance chief Holger Härter explains his use of stock options and other financial instruments to raise Porsche’s shareholding in VW
August
Porsche CEO Wendelin Wiedeking calls for the abolishment of the so-called VW Law, which caps any VW shareholder’s voting rights at 20%
November
— VW unexpectedly fires group CEO Bernd Pischetsrieder and replaces him with Audi chief Martin Winterkorn, effective January 1, 2007
— Porsche’s supervisory board authorizes management to increase its VW stake to 29.9%; board also approves plans to acquire half of the company in the next 5 years
2007
February
The European Court of Justice advocate general favors end to parts of VW Law
June
Porsche’s owners, the Porsche and Piëch families, decide to establish Porsche Automobil Holding SE to administer their investments in Porsche and VW
October
The European Court of Justice rules against parts of VW Law; finds 20% blocking minority “in combination” with the voting cap as illegal
2008
January
Germany proposes changes to the VW Law that still give Lower Saxony a 20% blocking minority and provide VW unions with a veto over plant closures. Approved by the cabinet in late May, the law faces a legal challenge from the EU
March
Porsche supervisory board gives approval to raise its VW voting stake to more than 50%. Later that month, Porsche denies media reports it is heading for a so-called “domination agreement”
April
With shareholder turnout low at VW’s annual meeting, Porsche exercises majority control over VW. A motion to abolish Lower Saxony’s blocking minority is vetoed by the state. Porsche later files a court appeal
April 30, 2007 — Porsche submits mandatory takeover offer after crossing 30 percent threshold.
August
Porsche and Piëch families decide to transfer their Porsche shares to a Vienna-based private trust called the Ferdinand Karl Alpha Foundation. They don’t publicly explain the move, but financial experts believe the families did it for tax reasons
October
— Porsche CEO Wendelin Wiedeking does not rule out taking full control of VW. In a statement, Porsche says it still intends to increase its VW shareholding to more than 50% by the end of 2008
— Porsche says it holds stock and options representing 74% of the voting rights at VW. It announces plans to take full control in 2009
2009
Jan. 5, 2009 — Porsche says it has raised its VW voting stake to 50.8 percent and confirms its plan to raise stake to 75 percent this year if conditions allow.
May 6 — Porsche drops Volkswagen takeover plan and says it will instead pursue a merger with Europe’s largest auto maker.
May 12 — VW Chairman Ferdinand Piech says Porsche must get its 9 billion euro debt under control before any deal can be agreed.
May 25 — Porsche confirms it received a 700 million euro loan from VW.
July 10 — Chairman Wolfgang Porsche calls an extraordinary supervisory board meeting for July 23 to discuss a possible sale of a stake in Porsche SE to Qatar worth over 5 billion euros.
July 23 — A proposal by Porsche’s board to prepare for a capital increase of at least 5 billion euros in cash and/or a contribution in kind, is approved by the supervisory board, setting the stage for a merger with Volkswagen.
Dec. 4 — Lower Saxony state premier Christian Wulff says Lower Saxony is to hold up to 22 percent of combined Volkswagen-Porsche Company while Porsche and Piech families are to hold 30 percent in combined group.
Dec. 7, 2009 — Volkswagen says it has bought 49.9 of Porsche’s sports car business at a cost of 3.9 billion euros.
2010
March 25 — Volkswagen says it will raise net proceeds of about 4.1 billion euros after issuing 64.9 million new preferred shares at a price of 65 euros each in its rights issue.
Oct. 19 — Financially troubled auto holding Porsche SE says it may not be absorbed into Volkswagen by the end of 2011, as planned, due to some unresolved legal and tax issues related to the deal, the chief executive of both companies says.
Nov. 30 — Porsche CEO says there are tax risks of 1–2 billion euros related to any merger with Volkswagen before 2014.
2012
July — A single share is transferred from VW to Porsche, permitting a “reorganisation” rather than a takeover under German Law, completing the merger and dodging tax risks.
The Ownership of Volkswagen
The Steal
Looking at this dramatic M&A timeline, the Piëch-Porsche clan started financially restructuring their assets as early as June 2017, while the Volkswagen Rule was being reviewed in EU courts. This is long before Porsche announced their VW takeover intent to the world.
Basically, Ferdiand Karl Piëch and his clan had nestled their way into a win-win situation on VW. Either Porsche would successfully takeover VW, further expanding the wealth influence of the Porsche family, or VW would take over Porsche in a manner that would give Porsche controlling interest of VW. The small detail was just that little debt problem, which Qatar solved in 2009. Vast profits were made squeezing short sellers and selling options from 2005–2008. But vast losses were also attained in the form of €13 billion in debt.
Wendelin Wiedeking’s manoeuvre didn’t increase shareholder value as promised. Instead it risked the company and it’s employees well being for a very questionable ROI on the VW stake. That’s why shareholders and counterparties tried to sue.
Could it be possible that former Porsche CEO Wendelin Wiedeking had been influenced by fellow board member Ferdinand to engage in the hostile takeover of VW? Wiedeking’s severance package scored in the high tens of millions. That’s a pretty great way to fail, or maybe he didn’t fail, but ultimately succeeded for the Porsche clan? He did this while screwing over institutional investors, though who cares about them.
A Schemer
Ferdiand Karl Piëch was no stranger to drama. When he took over the Volkswagen group in 1993, he became famous for turning VW into an autocracy under his command, firing many executives to consolidate power and control. As CEO of Volkswagen, he also kicked off with the Lopez trouble regarding stealing trade secrets and poaching from GM. The VP of GM Europe said of Piëch that Piëch had a “quasi-psychotic bunker mentality” at the start of that multi-year legal battle.
Ferdinand Karl had the nickname the “ice man” for chillingly cold stares. He deflected heat in 2005 when a secret slush fund was uncovered, named Account 1860, which had been used to buy select Volkswagen employees escorts and drugs.
When the takeover bid started in 2005, Piëch sat on both boards, and he never stepped away. He failed to inform VW board members of Porsche’s activities. It was Wiedeking, the CEO of VW, not Piëch, who first informed VW of Porsche’s position in confidential meetings with Wulff. When asked why Piëch, as Chairmain of VW, failed to inform the board, Piëch responded saying he hadn’t neglected his duties in any legally meaningful way. It was only with the support from labor unions that Piëch defended himself against an attempted ouster led by Wulff shortly after. When a JPM presentation to the board pointed out the glaring conflict of interest was a danger to VW, Piëch laughed it off as the worst presentation he’d seen in his life. As the takeover continued Piëch pretended to be uninvolved with the matter and feigned defeat in 2006, announcing his intent to step down as chairman of VW in exchange for two new Porsche board seats.
If Piëch had not been pulling any strings, why had Piëch held quiet as Porsche acquired their initial stake?
Why did Piëch fail to step down from Porsche’s board, to avoid the conflict of interest?
Through his actions its easy to reason that Piëch fully intended for Porsche, where he held 10% ownership, to gain significant control of VW.
Why, in 2008, did Wiedeking pursue a risky takeover of an over-valued VW when financial conditions around the world crumbled and credit dried up? Publicly until October of 2008, Wiedeking had been saying there was no takeover attempt, which is I guess is what every takeover attempt would say. Still, this was clearly against Porsche’s economic interests, and Wiedeking could have stuck to the publicly stated policy. However a continued takeover attempt, though risky, would serve the Piëch-Porsche clan’s ambitions.
In 2009, Piëch pretended to switch sides and do a VW takeover of Porsche, and Wiedeking was called a big fat loser. But in actuality, when Volkswagen consumed the Porsche brand, it allowed Porsche to actuate their majority voting control and side-step that peksy VW rule.
The End of Ferdinand’s Chairmanship
In April 2015, Ferdinand Piëch resigned as Chairman of the Board of Volkswagen. This was the result of a a failed “secret plot” to oust then VW CEO Winterkorn, Piech’s former protégé. The failed plot resulted in Piëch’s wife and himself giving up their board seats to their other Porsche family members. Conveniently, this was months before the Dieselgate scandal emerged, which saw Winterkorn resign anyway. The CEO of Porsche, Matthias Müller, took over as Chairman of the board of Volkswagen, and started the dieselgate cleanup. The Porsche family continues to own controlling interest in Volkswagen.
Recap of The Losers
- Short-sellers who sold VW stock at high prices, and got short squeezed waiting for a a VW crash, leading to somewhere between $7–15 billion in losses
- Porsche’s CEO and CFO, for leading Porsche to take €13 loans in the wake of the global financial crisis, for a botched takeover attempt
- The German government, and other VW shareholders, for not providing adequate oversight for the conflict of interest Ferdinand Piëch engaged in
- Investors in Porsche during the takeover attempt
- The German People, for missing out on tax gains due to tax loopholes that achieved a takeover in the form of a “restructuring”
Recap of Winners
- Ferdinand Karl Piëch, and the Ferdinand Karl Alpha Foundation
- The Piëch-Porsche clan
- Qatar
- Porche’s CEO and CFO, with their handsome severance packages
- Volkswagen, who went on to have a great five years until dieselgate hit the fan
