The Lion That Roared

In the chaos of last fall's panic in the financial markets, a fascinating tale went nearly unremarked in this country: the attempt by Porsche to acquire Volkswagon through an immense short squeeze. The attempt itself was audacious (Porsche is much smaller than Volkswagon), and for a time it looked like it might have succeeded. Porsche, however, has come crashing back to earth and now the mouse that roared has found itself trapped in the cat's paw. Tables Turn in Transaction of Two Auto Giants

When Wolfgang Porsche learned that his family’s sports car company would need an emergency cash infusion from its giant rival Volkswagen, he “went absolutely white.”

It was as though he’d heard someone died,” said one person briefed on the secret meeting between executives of the two companies.

The meeting, at the offices of the governor of Lower Saxony state, where Volkswagen is based, effectively ended the company’s audacious bid for Europe’s largest automaker. It also was the beginning of the end of Porsche’s cherished independence.

A day after the meeting, on March 23, fax machines around Germany spit out papers for Volkswagen’s board members to sign: an emergency loan of 700 million euros from Volkswagen, about $950 million at the time.

“This is becoming a reverse takeover on a financial level,” said Arndt Ellinghorst, head of automotive research at Credit Suisse in London. “Porsche has debt and VW has the luxury of cash.”

OK so the rich alpha German male (the name "Wolfgang Porsche" is probably enough to ensure a steady supply of nubile women) has had his comeuppance, as has Porche, which didn't acquit itself well during the short squeeze last fall. Porsche essentially kept mum about the size of its holding of Volkswagon stock, thus luring a number of short sellers to go short on VW. When Porsche strategically revealed the true extent of its holdings, all hell broke loose, and for a time VW was the most valuable company in the world while Porsche's owners became overnight billionaires. Sounds fun, but in many countries (like the supposedly "deregulated" US), such behavior is illegal. I guess they do things differently in Germany where, for all its noisy "social democracy," there is still a rich industrial elite that treats companies like BMW and Porsche as their personal duchies.

At heart, though, the role reversal — where Porsche turned from Volkswagen’s predator to its prey — is the latest scene in a family saga.

“In the end, this is about clans,” said Stefan Bratzel, head of the automotive research center at the University of Applied Sciences and Economics in Bergisch-Gladbach, near Cologne. “It is the Porsche clan versus the Piëch clan who belong to a single familial line, but maybe that makes the conflict that much harder.”

Both families descended from Ferdinand Porsche, who created the Volkswagen Beetle in the 1930s.

After World War II, Ferdinand’s son Ferry set up his own company, which became Porsche.

Meanwhile, Ferdinand’s daughter Louise married Anton Piëch, a Viennese lawyer; their son, Ferdinand Piëch, is now chairman of Volkswagen and has a seat on Porsche’s board.

In the early 1980s, the Porsche and Piëch clans beat back an effort by an errant cousin, Ernst Piëch, to sell his shares to a Kuwaiti investor. Instead, the Porsches bought him out, which allowed Wolfgang Porsche’s eventual appointment as chairman years later.

Four years ago, Porsche acquired a 20 percent stake in Volkswagen. Porsche’s chief executive, Wendelin Wiedeking, called the move defensive, and said that it was aimed at protecting one of his company’s most important partners from a hostile takeover.

But as time passed, it became clear that Porsche wanted full control of VW, so that the tiny carmaker could share the costs of developing new technologies with the much larger VW.

While interesting for the boardroom drama involved, this story also gives some insight into a possible future of US auto manufacturing, should the US's involvement in Chrysler and GM continue over the long-term. Porsche was able to make its play for VW because of the peculiar nature of its equity ownership: the German state of Lower Saxony is a 20% shareholder of VW's. It doesn't vote its shares (I think) and it it certainly has no intention of selling them. Thus, 20% of VW's equity is essentially inert leaving a much lower hurdle for a play such as Porsche's. And yet, the government is still intimately involved in VW's business. Note that the penultimate meeting described above took place in the office of the governor of Lower Saxony. VW's union is also intimately involved in its management and ownership, although not as much as the state.

Now, all of this doesn't mean that VW is some sort of moribund Leyland or "Government Motors." Indeed, between VW's ownership of VW, Audi, and now Porsche, I think we can say that it is much better positioned for success than GM has been in for at least 30 years, if not longer. For whatever reason, the combination of state interference, union management, and private ownership has resulted in a car company that still manages to make universally appealing cars for both the luxery market and the middle class. But this ownership structure also seems to encourage the sort of mischief that Porsche and VW engaged in, where rival members of families descended from Ferdinand Porsche could engage in a 21st century version of jousting. Really, with the spector of two rival "clans" fighting for the spoils of a car manufacturing kindom, while their unionized employees toil in their golden shackles of "lifetime employment," one wonders if Germany can truly be said to have moved beyond its feudal past.

The question for the US is: should this be the result we want for our state involvement with US car companies? 20 years from now, do we want to hear about stock shenanigans involving well-connected American investors while the US goverment is still a majority shareholder? Are we preserving a few score thousand union jobs for the sake of the few wealthy persons who can worm their way in as equity owners? I hope not.