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Porsche Gains Majority of VW, But Impediments Persist

January 06, 2009 05:30 PM
by Josh Katz
Porsche announced on Monday that it is now the majority shareholder in the much larger Volkswagen. But obstacles remain before Porsche has full control.

Porsche Takes Majority Stake in VW

Porsche has won indirect control of Volkswagen after purchasing more than 50 percent of the company’s shares, Porsche announced on Monday evening. Porsche previously owned 42.6 percent of VW shares, and it has now increased that number to 50.76 percent, Reuters reports. Porsche paid $8.49 billion for the extra 8.16 percent stake in the company.

Swedish law also forces Porsche “to make an offer for outstanding shares in the heavy truck maker Scania, in which VW is the dominant shareholder,” according to Agence France-Presse. However, Porsche “will offer a minimum price for Scania shares and has no ‘strategic interest’ in the company, the statement said.”

Porsche hopes to increase its VW shares to more than 75 percent over the coming year, which “would allow it to seal a so-called domination contract giving it full financial control,” AFP writes.

But Frank Schwope of NordLB said, “I think Porsche will stick with its 50 percent this year, since it would just be burning money to raise its voting stake to 75 percent at current prices,” according to Reuters.

The pursuit of a 75 percent stake is further complicated by laws that apply only to Volkswagen, stating that a minority investor with a 20 percent stake in the company can impede certain decisions, while German laws usually requires a 25 percent stake to have such influence. In other words, Porsche would need to own 80 percent of VW to have total decision-making control, but it is currently fighting the 20 percent law with the backing of the European Commission, Reuters reports.

Porsche had planned to take over VW last year, but held off on its bid because speculation had caused shares of VW to spike at that point. Shares of VW exceeded $1,350 at one time, briefly making VW “the biggest company in the world by stock market valuation,” according to AFP.

In August 2008, Volkswagon passed Ford to become the third-largest automaker in the world, behind General Motors and Toyota. VW, the biggest carmaker in Europe, is a much larger company than Porsche, but Porsche was able to up its influence through stock options.

Porsche is a family-owned business that produces 100,000 high-end sports cars annually. VW manufactures five million vehicles a year.

There may be tension between the two companies, as VW has a robust trade union culture, while the head of Porsche, Wendelin Wiedeking, is known for clashing with trade unions, AFP reports.

Background: Porsche’s October purchase of VW stock results in short squeeze

When Porsche increased its stake in VW in October, shares of VW jumped 286 percent, closing at the record high of about $1,198. Meanwhile, all 29 other stocks traded on Germany’s DAX Index went down in that period. Porsche’s purchase had caused a “short squeeze,” because traders who had sold VW’s stock “short” were forced to buy shares to reverse their earlier transactions.

A short sale occurs when a trader sells shares it does not own, hoping to repurchase the shares later on at a lower price. Some market observers believe the short squeeze phenomenon may become more common, with global stock prices at five-year lows and short sellers placing aggressive bets against the survival of many companies.

Opinion & Analysis: The burden of Scania

“Porsche is being told that if it wants Volkswagen to be its bride, it’ll have to marry the carmaker’s ugly sister too,” Lionel Laurent of Forbes writes, referring to the required takeover bid for Scania. But Laurent suggests that Porsche is making the best decision by trying to avoid involvement with Scania, as “the wider difficulties facing the automobile sector make it a risk not worth taking.”

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