7. Porsche Versus VW

Investment Analysis
Case Study: Porsche vs. VW – Why short sellers made
VW the world's priciest firm?
Dr. Denis Schweizer
Associate Professor of Finance
John Molson School of Business, Concordia University
Mailing address: 1455 de Maisonneuve Boulevard West, Montreal, Quebec H3G 1M8
Office:
MB 11.305
Telephone:
+1(514)-848-2424, ext. 2926
Fax:
+1(514)-848-4500
E-mail:
[email protected]

Porsche’s Strategic Rationale for the VW Takeover
Business Expansion, Preservation of Family Interests
 In 2005, Porsche was said to be the world’s most
profitable OEM with €3bn of cash reserves
 Management and the owning families Porsche and
Piëch had to decide whether to continue to retain
and invest profits in the company
 Position as pure luxury niche manufacturer however
offered only limited growth prospects
 CO2-emission quotas and new engine technologies would significantly threaten the existing
business model with limited scope of R&D
 In March 2005, the Porsche management proposed
to acquire Volkswagen AG:

− Both companies had long-lasting collaborations
− Volkswagen possessed broad brand and
technology portfolios
− Given a large free float, VW was a likely takeover candidate – also for Porsche competitors
 Acquisition could secure long-term family interest to
control both companies
Source: Volkswagen AG
Investment Analysis
Denis Schweizer

Possible diversification of brand portfolio (indicative)
Price

Avg. Motorization

VW-shareholder structure as of 31-Dec 2004¹
State of Lower Saxony

21%

Brandes Investment
Partners

12%

Freefloat

67%

1Common

shares, adjusted for treasury shares
Page 2

Porsche’s Family Tree

Ferdinand Porsche
1875-1951

Louise Porsche

Ferdinand "Ferry" Porsche

1904-1999

Ernst Piëch
1929

•Ex-CEO Porsche Holding
Salzburg
•Vineyard Owner

Investment Analysis
Denis Schweizer

1909-1998

Louise Daxer-Piëch
1932-2006

Ferdinand Piëch

Hans Michel Piëch

•Mechanical Engineer
•Chairman of the VW Board
of Directors
•Board Member of Porsche
Stuttgart and Porsche Holding
Salzburg

•Lawyer
• Board Member of Porsche
Stuttgart and Porsche Holding
Salzburg
•Board Member of VW
•Shareholders‚ Committee
Porsche Holding Salzburg

1937

1942

Page 3

Porsche’s Family Tree Cont’d

Ferdinand Porsche
1875-1951

Louise Porsche

Ferdinand "Ferry" Porsche

1904-1999

Ferdinand Alexander
"F.A." Porsche

Gerhard Anton
Porsche

• Former Head of Design Porsche
Stuttgart

• Farmer

1935

Investment Analysis
Denis Schweizer

1909-1998

1938

Hans-Peter Porsche

Wolfgang Porsche

• Former Head of Production
Porsche
• Board Member of Porsche
Stuttgart and Porsche Holding
Salzburg

• Master of Business
Administration
•Board Member of Porsche
Stuttgart and Porsche Holding
Salzburg and VW
• Shareholders‚ Committee
Porsche Holding Salzburg

1940

1943

Page 4

David Facing Goliath Required a Secret, “Creeping-in“ Acquisition to Prevent Early Position
Contribution Analysis: Combining Porsche and VW (2005A)
€m
93%

100.570 7%
3.776

33%

1.829

Revenues
67%

43%

57%

EBIT
Net Income

€m
87%

Equity

115.724 5%

95%

Debt

142.791 7%

93%

Total BS

27.067 13%

5.281.000 2%

#
98%

Vehicles Sold

357.000 3%

97%

Employees

 Three major obstacles when trying to take over 15x larger1 VW:
− Resource Constraints: Even significant cash reserves of €3bn would be insufficient to buy
control in VW at a market capitalization of €11.9bn
− Management opposition: Despite an appealing economic rationale of a combination, the board
of VW would probably suggest a reverse takeover rather than approving Porsche to “wag the dog”
− VW-Law: While the state of Lower Saxony had a blocking minority vote, no other shareholder
could execute more than 20% of the total voting rights
Sources: Porsche SE, Volkswagen AG
Investment Analysis
Denis Schweizer

1

In terms of revenue
Page 5

Legal Framework for Strategic Measures and Disclosure Thresholds Depending on Shareholdings



Strategic Measures

Ownership
Concentration

Shareholding ≥ 95% (% of equity capital)

100%

Disclosure Requirements and
Mandatory Offer

Squeeze-out
Shareholding ≥ 75% (% of AGM-presence)






Profit transfer agreement
Restructuring (e.g. sale of business unit)
Delisting
Merger or change of legal entity
Shareholding ≥ 50% (% of AGM-presence)





50%

Simple majority votes at AGM (e.g. profit
distribution, election of advisory board)
Shareholding ≥ 25% (% of AGM-presence)



Blocking minority at AGM



Shareholding ≥ 5% (% of equity capital)
Convening of Annual General Meeting

Shareholding ≥ 30% (% of equity capital)

75%

Acquisition of “controlling stake“ in a company (at
least 30%) triggers the obligation to submit a
mandatory offer for all outstanding shares



Shareholding ≥ 10% (% of voting rights)
Duty to disclose strategic intentions of share
ownership and origin of funds



Shareholding ≥ 5% (% of voting rights)
Disclosure of aggregated ownership of share
voting rights and derivatives that enable unilateral
acquisition of shares

25%

Prior to gaining effective control over a company (with 75% of the voting rights in the AGM), a
mandatory takeover offer has to be submitted to all other shareholders
Investment Analysis
Denis Schweizer

Page 6

Mandatory Takeover Bid can cause Major
Liquidity Obstacle to Bidders
Mandatory Offer Regulation


The regulator aims to protect minority shareholders by giving them the chance to sell
their stocks in case a new blockholder who gains effective control (≥30%) appears.



During a period of at least four weeks, the new blockholder has to offer a defined
minimum price to all other shareholders.



This minimum price has to equal at least the historic three-months volume-weighted
average price (3M-VWAP) of the stock.

Implications for the Bidder


Bidder has to announce a mandatory offer only when exceeding the 30%-threshold
and is thereafter free to further increase his stake.



The mandatory offer is particularly relevant for bidders with liquidity constraints
who do not want to acquire the entire company, as all stockholders could accept
the offer → partial acquisition.



The minimum mandatory offer price equals the 3M-VWAP.



When the market price is above the 3M-VWAP it is unlikely that
it will be accepted by the shareholders.



Cash settled equity swaps can help to secretly plan such a timing.
Investment Analysis
Denis Schweizer

“Effective control”
AGM-votes

Equity needed

95%>

54.9%

75%

41.2%

50%

31.7%

25%

15.9%

 Most strategic

measures
require a certain share of
votes at the AGM, not of
overall equity capital

 The

L5Y-ø-presence of
voting rights at DAX-30
AGMs was 54.9%.

 Therefore ~32%

of total
equity enable a 50%majority (“effective
control“)

Amount of equity that would be needed on average to achieve the given levels of voting-power in the AGM (based on
L5Y- L5Y-ø-presence of voting rights at DAX-30-AGMs)

1

Page 7

1

Success-Story: Mandatory Takeover Offer of
Porsche KGAA for Volkswagen AG
25-Mar-07
Porsche Advisory Board authorizes
management to make a mandatory
takeover offer for VW

in € 125
120

30-Apr-07 until 29-May-07
Mandatory offer period ø-share price:
€109.61

115
110
105
100
95

30-Apr-07 until 29-May-07
4 week mandatory offer price:
€100.92

90
85
80
Mar-07

Apr-07
VW XETRA-Closing
Schaeffler
Price Offer

May-07
Porsche Offer Price

Jun-07
3M-VWAP (Minimum Offer Price)

Increasing speculation about a takeover of VW lead to a continuously increasing VW share
price that allowed Porsche to keep its offer well below market levels
Investment Analysis
Denis Schweizer

Page 8

The Takeover Plan: Initially Pretending Friendly
Intentions...
Mandatory offer period
(~30%)

VW Equity
Stake

Intended change in control
(>50%) & PTA (>80%)

100%

75%

Squeeze-Out: 95%

Friendly
“anchorinvestor“ (~20%)

50%

Market
speculation &
stake increase
(<20%)

PTA: 80%

Further market
speculation &
stake increase
(<50%)

Consolidation: 50%

Mandatory offer: 30%
Blocking minority: 25%

25%

0%

Disclosure
Threshold: 5% (7.99%)

Sep-05

I.

Sep-06

II.

Sep-07

III.

Sep-08

IV.

Gain VW & union Increase stake by
Clear
Further stake increases
support by protecting speculating on mandatory financed by speculation on
VW against hedge
own take-over offer rule
heated rumors and
fund activism
rumors
(4 weeks)
additional bank loans

Investment Analysis
Denis Schweizer

May-09

V.

Expected fall of VWlaw: Clearing way for
profit transfer agreement & consolidation

Page 9

…then Clearing the Road ahead by Eliminating
the 30% Hurdle…
1.000

Offer period ø-share price:
€109.61

120
110

750

100

4 week mandatory offer:
€100.92

90

500

80
Mar-07

Apr-07

May-07

Jun-07

250

0
Sep-05

Sep-06

VW XETRA Closing Price

Sep-07
3M Weighted Average

Sep-08

May-09

Porsche Mandatory Offer Bid

 Mandatory takeover offer to all shareholders at ownership ≥30% to protect minority shareholders
 Risk for Porsche to be forced to buy all remaining 70% of VW stock at a minimum price of the
weighted average share price of the past three months
 By giving a mandatory offer when the rolling 3M-average price is below the current market price,
Porsche can ensure that nobody will accept the offer
Sources: Datastream, Porsche SE
Investment Analysis
Denis Schweizer

Page 10

…and Continuing to Finance Additional Share
Purchases with Speculation in Uncertain Markets
Porsche, the investment bank
“(…) the fact, that car manufacturing appears to
have descended into a sideline occupation for
Porsche seems to be of interest for nobody. (…)
Porsche is primarily one thing: An incredibly
successful investment bank. (…) CFO Holger Härter
shines with high-risk speculation using options as
well as swaps and could accomplish the masterpiece
of generating profits that exceed this year’s €7.4bn
revenue. Nowadays the question arises, when the
Porsche-VW-bubble will finally burst.”

Consolidated income statement of the Porsche Group
for the period from 1 August 2007 to 31 July 2008

Handelsblatt, 09 October 2008
Porsche SE Annual Report 2007/2008



In addition to direct stock ownership, options and total return equity swaps were used to acquire VW



Due to a legal loophole in the German legislation, cash settled swaps do not have to be disclosed



Therefore Porsche could leave the public unaware of its actual ownership of VW stocks and
stimulate the market with rumors about whether it would strive to acquire a majority in VW or not



With these contradictory rumors about a VW takeover, Porsche managed to generate extraordinarily
high trading income which it used to finance additional Volkswagen shares

Sources: Handelsblatt, Porsche SE
Investment Analysis
Denis Schweizer

Page 11

The highlight of Market Uncertainty about
Porsche’s Intention: The Fall 2008 Short Squeeze
Oct-2008 short squeeze

1.000

750

500

Shareholder structure:

Short sellers make VW the
world's priciest firm

 Porsche:
− 42.6% direct ownership

“(…) Short sellers desperate to close their positions paid
as much as 1,005 Euros a share during the session following
Sunday's news that there was less than 6 percent of VW
voting stock still floating in the market. At that price VW's
stock was worth €296bn ($370bn), or more than the $343bn
market capitalization of Exxon Mobil. (…)”

− 31.5% in equity swaps
and options
 Lower Saxony:
− 20.0% direct ownership
 Remaining free float:

Reuters, 28 October 2008

− 5.9%
 Market cap on loan:

250

− 12.8%
0
Sep-05

Sep-06

Sep-07
VW XETRA Closing Price

Sources: Datastream, Reuters

Investment Analysis
Denis Schweizer

Sep-08

May-09

 # of short positions in
VW stock exceeded the #
of free float stocks, gave
speculators only limited
chances to unwind their
positions and caused a run
on the remaining shares

Page 12

While Speculation Gains Tumble in the Crisis, additional Stakes are Increasingly Financed with Debt
Debt level of Porsche in 2008 amounts to 5x the value of 2004
2004A

2008A

2008A
213.496

167.919
126.972
103.107
132.908

161.639

45.577
Debt
Equity

Equity
Ratio

8.119

23.865

5.795
2.324

28.731
16.846

35.011

51.857
Pro-Forma1

Porsche

VW

Porsche

VW

28.6%

18.8%

37.0%

20.8%

32.1%

 In order to pay down own debt, Porsche aimed to increase share holdings in VW to >80% to access VW‘s
cash reserves and cash flows with an Profit Transfer Agreement (PTA)
1Contribution

analysis neglecting additional acquisition costs for the remaining 70% of VW shares and synergies

Investment Analysis
Denis Schweizer

Sources: Porsche SE, Volkswagen AG
Page 13

A Speculation on the EU-enforced Fall of VW-law
to Overrule State of Lower Saxony’s Influence
Confirmation of VW-Law – End of the road?
Porsche loses suit over
rights to VW

“(…) rejected a Porsche suit that sought to
overturn a corporate rule at Volkswagen that
allows shareholders with a 20 percent stake to
block major company decisions. (…) Porsche
said that it may slow purchases of VW stock as
the credit crisis and recession hurt sales.”
China Daily, 28 November 2008

Feud threatens Porsche’s
empire-building ambitions

“(…) dysfunctional family is involved in bitter internal
power struggles and personal feuds.
(…) difficulties have now provided Mr. Piëch with the
opportunity to turn the tables on his family rivals and
Porsche’s management.”
Financial Times, 23 April 2009

 Porsche’s tactic was a bet on the fall of the VW-law: If the state of Lower Saxony lost its veto
power, Porsche could establish a profit transfer agreement to tap VW’s cash flows
 However, the confirmation of the law in the German Bundestag crossed these plans
 Indebtedness of Porsche increased pressure on the bidder and evoked a family war: While the
Porsche branch wanted to hold on to a solution with both companies under family ownership, the
Piëch-branch favored a reverse takeover by VW to avoid additional risks
 In May 2009, refinancing of large parts of its debt outstanding caused a severe liquidity problem
for Porsche and an escalation of the family war, resulting in an end of the family ownership of Porsche
through a reverse takeover by Volkswagen
Sources: China Daily and Financial Times
Investment Analysis
Denis Schweizer

Page 14

The Outcome: By the End of FY2011, Porsche
Will be Fully Integrated into Volkswagen
Volkswagen will take over Porsche in two steps:
Step I:
49.9% by end of
FY 2009

Step II:
100% by end of FY
2011

 After that, Porsche will be a 100% subsidiary and 10th brand in the portfolio of VW
 The top-management of Porsche has been replaced
 An obstacle to an immediate integration of Porsche were hedge funds that sued Porsche for
compensation of losses that they attributed to market manipulations by Porsche
 In late 2010, these claims were rejected by American courts putting the integration back on track
 Qatar Investment Authority provided an
equity injection and a €750m bridge loan to
finance the acquisition
 After initial disarrays, today both Porsche
families remain major VW-shareholders but
have not as much influence as prior to the
takeover

Ownership structure of VW-voting
rights as of 31-Dec 2009
9%
17%
21%

53%

Porsche SE &
Porsche GmbH
State of Lower
Saxony
Qatar Investment
Authority
Freefloat

Sources: Volkswagen AG, Financial Times
Investment Analysis
Denis Schweizer

Page 15

Implied Market Impact Function
 Implied market impact function:
𝐵𝐵𝐵𝑡
𝐵𝐵𝐵𝑡
+ 𝛼2 ∙
𝑆𝑆𝑡 = 𝑆𝑆𝑡−1 + 𝛼1 ∙
Free Float t
𝐹𝐹𝐹𝐹 𝐹𝐹𝐹𝐹𝐹𝑡

2

∙ 𝑆𝑆𝑡−1

With
− 𝑆𝑆…
Market price
− 𝛼1 and 𝛼2 … Impact factors
− 𝐵𝐵𝐵𝑡 …
share bought in 𝑡 to total outstanding shares in 𝑡
− 𝐹𝐹𝐹𝐹 𝐹𝐹𝐹𝐹𝐹𝑡 …% of shares not hold by blockholders (proxy for shares available) in 𝑡

 Example 𝛼1 = 𝛼2 = 1,5 𝑎𝑎𝑎 SPt−1 = 100 :
− 𝐵𝐵𝐵𝑡 = 1% and 𝐹𝐹𝐹𝐹 𝐹𝐹𝐹𝐹𝐹𝑡 = 40%
→ 𝑆𝑆𝑡 = 𝑆𝑆𝑡−1 + α1 ∙ 0.025 + α2 ∙ 0.000625 ∙ 𝑆𝑆𝑡−1 = 100 + 0.0384375 ∙ 100 =
103.84
− 𝐵𝐵𝐵𝑡 = 1% and Free Float t = 10%
→ 𝑆𝑆𝑡 = 𝑆𝑆𝑡−1 + α1 ∙ 0.1 + α2 ∙ 0.01 ∙ 𝑆𝑆𝑡−1 = 100 + 0.165 ∙ 100 = 116.50
Investment Analysis
Denis Schweizer

Page 16

Derivation of a Call Option Delta (1/2)
 Black Scholes formula for a Call-Option: 𝐶 = 𝑆0 ∙ 𝑁 𝑑1 − 𝑋 ∙ 𝑒 −𝑟𝑟 ∙ 𝑁 𝑑2 ,
with 𝑑1 =

𝑆

𝜎2

𝑙𝑙 𝑋0 + 𝑟+ 2 𝑇
𝜎 𝑇

and 𝑑2 = 𝑑1 − 𝜎 𝑇.

 The distribution function of the normal-distribution at point 𝑑1 :
𝑁 𝑑1 =

1
2𝜋

∙

2

𝑑1 −𝑥
∫−∞ 𝑒 2

∙ 𝑑𝑑 .

 Taking the derivative for the argument will return the density function
 Hint: Differentiation of an integral at the upper limit will return the anti-derivative at this point
𝜕𝜕 𝑑1
𝜕𝑑1

Investment Analysis
Denis Schweizer

=

2

𝑑1 −𝑥
1
𝜕
∙
∫ 𝑒 2
2𝜋 𝜕𝑑1 −∞

∙ 𝑑𝑑 =

1
2𝜋

∙𝑒

𝑑2
− 1
2

= 𝑁 ′ 𝑑1 and

𝜕𝜕 𝑑2
𝜕𝑑2

=

1
2𝜋

∙𝑒

𝑑2
− 2
2

Page 17

Derivation of a Call Option Delta (2/2)

=

1

2𝜋

∙

𝑑22
1
1
𝜕𝜕 𝑑2
−
2
=
∙𝑒
=
∙ 𝑒−
𝜕𝑑2
2𝜋
2𝜋

𝑑12 −2𝜎 𝑇𝑑1 +𝜎2 𝑇
2
𝑒−

′

= 𝑁 𝑑1 ∙ 𝑒

𝑑1 −𝜎 𝑇
2

2𝜎 𝑇𝑑1 −𝜎2 𝑇
2

𝑆0
𝜎2
𝑙𝑙 𝑋 + 𝑟+ 2 𝑇 𝜎2 𝑇
𝜎 𝑇∙
−
2
𝜎 𝑇
𝑒

2

′

= 𝑁 𝑑1 ∙

𝜎2 𝑇
𝜎 𝑇𝑑1 −
2
𝑒

𝑆0 𝑟𝑟
∙ 𝑒 = 𝑁 ′ 𝑑2
𝑋
 The Delta Δ of a Call-Option is the first derivative of the Black-Scholes formula for Calls
with respect to current share price:
= 𝑁 ′ 𝑑1 ∙

= 𝑁 ′ 𝑑1 ∙

𝜕𝜕
𝜕
=
𝑆0 ∙ 𝑁 𝑑1 − 𝑋 ∙ 𝑒 −𝑟𝑟 ∙ 𝑁 𝑑2
𝜕𝑆0 𝜕𝑆0
1
1
= 1 ∙ 𝑁 𝑑1 + 𝑁 ′ 𝑑1 ∙
∙ 𝑆0 − 𝑋 ∙ 𝑒 −𝑟𝑟 ∙ 𝑁 ′ 𝑑2 ∙
𝜎 𝑇 ∙ 𝑆0
𝜎 𝑇 ∙ 𝑆0
′
𝑁 𝑑1
𝑆0
1
= 𝑁 𝑑1 +
− 𝑋 ∙ 𝑒 −𝑟𝑟 ∙ 𝑁 ′ 𝑑1 ∙ ∙ 𝑒 𝑟𝑟 ∙
𝑋
𝜎 𝑇
𝜎 𝑇 ∙ 𝑆0
′
′
𝑁 𝑑1
𝑁 𝑑1
= 𝑁 𝑑1 +
−
= 𝑁 𝑑1
𝜎 𝑇
𝜎 𝑇
Δ𝐶𝐶𝐶𝐶 =

Investment Analysis
Denis Schweizer

Page 18

Porsche Managers Are Accused of Loan Fraud,
Market Manipulation and Disloyalty
Attorney accuses former Porsche
executive Härter

The failed takeover of Volkswagen by Porsche has a
sequel in court: The prosecution in Stuttgart has indicted
the former CFO Holger Härter and two other financial
managers of the sports car manufacturer. They are
accused of having committed loan fraud.
[…] The managers are accused of
having provided false
information to banks in connection with a follow-up financing of
a loan due in March 2009.

Active Porsche manager accused

New details on the credit fraud indictment against former
Porsche executive Härter: According to a report one of
the accused Porsche managers is still working for the
sports car manufacturer.
[…] Not only former Porsche executives are accused of credit
fraud, but one of the three defendants is still employed as a
financial manager.
Manager Magazin, March 11, 2012

Three managers suspected of fraud

[…] This loan was primarily used to back up call options
on VW shares. The managers are accused to have stated an
amount which was € 1.4 billion lower than the cash
require-ments needed to exercise these options.

[…] In addition to the charges on credit fraud, investigations
are run on suspicion of disloyalty and market
manipulation. Porsche‘s information policy is meanwhile
subject to many legal disputes in Germany and abroad.

[…] Härter announced he faced the allegations emphatically
“All information requested by the lender
have been provided in full“

[…] Porsche‘s attempt to takeover VW caused extreme
swings in the VW share price. Aggrieved investors claim
they were misled by Porsche, as the company denied its
intention to acquire a majority stake in VW.

Spiegel, March 06, 2012

FAZ, March 06, 2012

Investment Analysis
Denis Schweizer

Page 19

VW: A High Price for Porsche Is Justified by Synergies Minority Shareholders May Be at a Disadvantage
VW needs to pay more for Porsche
Conditions have changed after the takeover negotiations of Porsche and
VW: The integration of the second half of Porsche‘s operative business
will cost € 600 million more than expected.
Porsche lost the 2009 takeover battle against VW. However, the risks of the
originally planned merger were too high due to complaints worth billions against
Porsche SE. As an alternative both firms agreed to sell the company’s sports car
business to VW.
However, the value of the operating business had grown strongly since 2009.
Corporate representatives confirmed that the price for the second half of the
division would be about € 4.5 billion. This is approximately € 600 million more
than agreed three years ago.
The higher value benefits the owner families of Porsche SE. However, paying
such a large amount could cause problems with minority shareholders who
criticized the expensive pricing of Porsche already in 2009.
VW argues that the higher purchase price can be justified by synergies which can
be generated earlier than planned. Due to the elimination of tax barriers, the
acquisition can be completed this year already. Fully integrated,
Porsche and VW will save at least € 700 million annually.

FTD, June 12 2012
Investment Analysis
Denis Schweizer

Page 20

VW Structures the Porsche Acquisition as a Restructuring, Saving Essentially EUR 1.5 bn of Tax
VW pays a little bit of taxes for Porsche
acquisition
VW CEO Martin Winterkorn finalizes the takeover of Porsche to
August 1, 2012. That goes faster than expected – and almost tax free.
Still, a little tax contribution to tax authorities is going to be
transferred.
Europes largest automotive producer will in fact pay taxes for its acquisition
of Porsche - tough only an insignificant sum. VW CFO Hans Dieter Pötsch
has said that given the accelerated integration of Porsche AG tax payments
of EUR 100 mn. Arise.
Thanks to a tax loop-hole in the german tax code the acquisition of around
half of Porsche AG that does not yet belong to VW almost tax free be
executed for EUR 4.5 bn.
VW has managed to treat the acquisition of Porsches sportscar business
legally as a restructuring by transfering a single VW common stock to
Porsche Holding SE. This leads to a completely different tax treatment.
While in an acquisition a number of different taxes are payable, a
restructiuring is tax-exempt, saving VW a total of EUR 1.5 bn in
potential tax payments.

FTD, July 5 2012
Investment Analysis
Denis Schweizer

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