IHS Global Insight Perspective | |
Significance | Despite the recent agreement between the Porsche and Piëch families, the main shareholders in Porsche, that the company would become integrated into the Volkswagen Group, talks over the process have broken down after VW called a halt. |
Implications | The main stumbling block appears to be Porsche's unwillingness to give full disclosure on the state on if its finances after accruing what is believed to be in the region of 10 billion euro in debt in acquiring a majority stake in VW. |
Outlook | The halt in talks should only be a temporary hiatus as the chief shareholders in Porsche, Wolfgang Porsche and Ferdinand Piëch, are likely to force the various management parties to come to the table again. However, the balance of power appears to be shifting inexorably away from Porsche CEO Wendelin Wiedeking and towards his counterpart at VW, Martin Winterkorn. |
According to numerous press reports over the weekend, talks to discuss the process of integrating the Porsche sports car company, Porsche AG, into the Volkswagen (VW) Group have broken down after VW's management suspended the discussions. The main issue that talks appear to have faltered on is the lack of full disclosure to VW's management on the state of Porsche's finances. The Financial Times (FT) reported that it obtained a copy of an internal letter written by VW CEO Martin Winterkorn that said that his company needed "full transparency" about Porsche's financial situation in order to avoid compromising VW's own financial foundation by integrating a heavily indebted Porsche into the VW Group. The letter added, "We share the view of the head of our works council that we need a constructive atmosphere for the talks. At the moment, this is not given." The FT also reported that the impetus for calling a halt to discussions came from the head of VW's works council and the newly appointed head of the works council of the Porsche holding company, Bernd Osterloh. He has consistently opposed Porsche's creeping takeover of VW, although his opposition to the move appeared to have been placated following his appointment as the head of the Porsche SE workers council. However, it appears that Osterloh has used the emerging crisis surrounding Porsche's financial position to boost his position as a powerful agent in the complex management dynamics surrounding the increasingly convoluted relationship between Porsche and VW. Osterloh and VW CEO Martin Winterkorn appear to be gaining power and backing as Porsche CEO Wendelin Wiedeking and his right-hand man, Porsche CFO Holger Härter, are blamed for Porsche seemingly overreaching itself in its massively ambitious acquisition of a majority stake in VW. After demanding that talks due for today be halted, Osterloh demanded that Wolfgang Porsche, head of Porsche's supervisory board, make a clear statement about what the family wanted: a merger, a sale of Porsche or an alternative outcome.
Despite the Porsche and the Piëch families agreeing that Porsche should now be integrated into the VW Group, there is still work to be done and individual agendas to be pursued before an agreement is reached. Despite the strategy being agreed two weeks ago by the two family shareholders, VW has accused Porsche's management of lacking commitment with regards to the discussions. According to the FT an unnamed VW executive said that Porsche's management had pursued the talks "halfheartedly" and that its leading negotiator did not attend a first meeting last week. This follows Ferdinand Piëch's comments last week that his original idea of a full takeover of Porsche by the VW Group was still a possibility, saying that it was the simplest way to integrate Porsche into the VW Group. Piëch also stated that whatever course of action was decided upon, he favoured Winterkorn to head the new group and that he thought that Wiedeking would not accept a lesser role in the organisation, implying that Piëch does not believe that Wiedeking will play a part in the future of VW and Porsche.
Outlook and Implications
There has been major shift in the balance of power in the Porsche-VW corporate dynamic away from Wolfgang Porsche, Wendelin Wiedeking and Holger Härter and towards Piëch, Winterkorn and Osterloh, who form the management power base at VW. This reflects the increasingly poor perception by shareholders and the markets of the financial stability of Porsche Automobil Holding SE, which has in the region of 10 billion euro of debt. Porsche SE is facing difficulties in shoring up its balance sheet as a result of a reluctance by participating banks to take up the option of providing an additional 2.5 billion euro, which was a component of its recent refinancing of its 10-billion-euro credit line, a refinancing that was only completed on the eve of the loan repayment deadline (see Germany: 25 March 2009: Porsche Secures 12.5-bil.-Euro Loan Refinancing to Fund Further VW Share Purchases). There is a report in today's Der Spiegel that Porsche has made an inquiry about the possibility of state loans to shore up its balance sheet in response to the massive decline in demand for its passenger cars in light of the global financial slowdown.
This indicates that Porsche's management is still exploring every opportunity to repair its own balance sheet and thus strengthen its negotiating position with regards to the future relationship between Porsche and VW. It is still possible that Porsche may look to alternative sources of funding and sell a stake to cash-rich sovereign wealth fund. However, as a major Porsche shareholder Ferdinand Piëch is highly likely to oppose such a move and continue to press for a solution in which Porsche AG would either be acquired by the VW Group or integrated into its brand structure. There would also be a massive irony in such an outcome as Porsche's initial interest in acquiring VW shares was billed as a way of protecting the company from foreign takeover. Adding to the woes of Porsche's management is the decision by the German financial regulator BaFin to re-open the investigation into Porsche's strategy to acquire VW shares (see Germany: 13 May 2009: Porsche's VW Takeover Plan Faces Regulatory Probe). Either way, it seems that the shift in power between Porsche and VW's management appears to be acquiring a momentum of its own.