7. Porsche Versus VW

8/10/2019 7. Porsche Versus VW

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Dr. Denis Schweizer Associate Professor of Finance John Molson School of Business, Concordia UniversityMailing address: 1455 de Maisonneuve Boulevard West, Montreal, Quebec H3G 1M8Office: MB 11.305 Telephone: +1(514)-848-2424, ext. 2926Fax: +1(514)-848-4500E-mail: [email protected]

Case Study: Porsche vs. VW – Why short sellers made VW the world's priciest firm?

Investment Analysis



Investment AnalysisDenis Schweizer

Price

Avg. Motorization

21%

12%

67%

VW-shareholder structure as of 31-Dec 2004¹

State of Lower Saxony

Brandes InvestmentPartners

Freefloat

Source: Volkswagen AG1Common shares, adjusted for treasury shares

Possible diversification of brand portfolio (indicative)

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 techno-

logies would significantly threaten the existingbusiness model with limited scope of R&D

In March 2005, the Porsche management proposedto 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 take-

over candidate – also for Porsche competitors

Acquisition could secure long-term family interest to

control both companies




Ferdinand Porsche 1875-1951

Louise Porsche 1904-1999

Ferdinand "Ferry" Porsche 1909-1998

Ernst Piëch1929

• Ex-CEO Porsche HoldingSalzburg

•Vineyard Owner

Louise Daxer-Piëch1932-2006

Ferdinand Piëch1937

• Mechanical Engineer•Chairman of the VW Board

of Directors

•Board Member of PorscheStuttgart and Porsche Holding

Salzburg

Hans Michel Piëch1942

•Lawyer

• Board Member of PorscheStuttgart and Porsche Holding

Salzburg

•Board Member of VW

•Shareholders‚ Committee

Porsche Holding Salzburg

Porsche’s Family Tree




Ferdinand Porsche 1875-1951

Louise Porsche 1904-1999

Ferdinand "Ferry" Porsche 1909-1998

Ferdinand Alexander

"F.A." Porsche1935

• Former Head of Design Porsche

Stuttgart

Gerhard Anton

Porsche1938

• Farmer

Hans-Peter Porsche1940

• Former Head of Production

Porsche

• Board Member of Porsche

Stuttgart and Porsche Holding

Salzburg

Wolfgang Porsche1943

• Master of Business Administration

•Board Member of Porsche

Stuttgart and Porsche HoldingSalzburg and VW

• Shareholders‚ Committee

Porsche Holding Salzburg

Porsche’s Family Tree Cont’d




357.000

Total BS

98% Vehicles Sold

142.791

5.281.000

97% Employees

115.724 95%

Equity27.067 13% 87%

Net Income1.829 43% 57%

EBIT3.776 33% 67%

Revenues100.570 93%

Debt

93%

5%

7%

2%

3%

7%

€m

€m

#

1 In terms of revenue

Contribution Analysis: Combining Porsche and VW (2005A)

Sources: Porsche SE, Volkswagen AG

David Facing Goliath Required a Secret, “Cree-

ping-in“ Acquisition to Prevent Early Position

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




Legal Framework for Strategic Measures and Dis-

closure Thresholds Depending on Shareholdings

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

Strategic Measures Disclosure Requirements and

Mandatory Offer

Shareholding ≥ 75% (% of AGM-presence)

Profit transfer agreement Restructuring (e.g. sale of business unit) Delisting

Merger or change of legal entity

Squeeze-out

Shareholding ≥ 95% (% of equity capital)

25%

50%

75%

100%


Simple majority votes at AGM (e.g. profitdistribution, election of advisory board)


Blocking minority at AGM


Convening of Annual General Meeting

Duty to disclose strategic intentions of shareownership and origin of funds

Disclosure of aggregated ownership of share voting rights and derivatives that enable unilateralacquisition of shares

Acquisition of “controlling stake“ in a company (at

least 30%) triggers the obligation to submit amandatory offer for all outstanding shares


Shareholding ≥ 10% (% of voting rights)

Shareholding ≥ 5% (% of voting rights)

Ownership

Concentration




Mandatory Takeover Bid can cause Major

Liquidity Obstacle to Bidders

Mandatory Offer Regulation “Effective control”

The regulator aims to protect minority shareholders by giving them the chance to selltheir 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 definedminimum price to all other shareholders.

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

AGM-votes Equity needed

95%> 54.9%

75% 41.2%

50 31.7

25% 15.9%

Bidder has to announce a mandatory offer only when exceeding the 30%-thresholdand 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 acceptthe offer → partial acquisition.

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

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

Cash settled equity swaps can help to secretly plan such a timing.

Implications for the BidderMost strategic measures

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

The L5Y-ø-presence of

voting rights at DAX-30 AGMs was 54.9%.

Therefore ~32% of totalequity enable a 50%-majority (“effectivecontrol“)

1

1 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)




0%

25%

50%

75%

100%

Mandatory offer period

(~30%)

I.Gain VW & union

support by protecting

VW against hedge

fund activism

Squeeze-Out: 95%

Consolidation: 50%

VW Equity

Stake

Sep-05

Disclosure

Threshold: 5% (7.99%)

Sep-06 Sep-07 Sep-08 May-09

Blocking minority: 25%

Mandatory offer: 30

PTA: 80%Friendly

“anchor-

investor“ (~20 )

Market

speculation &

stake increase

(<20%)

Intended change in control

(>50%) & PTA (>80%)

II.Increase stake by

speculating on

own take-over

rumors

III.Clear

mandatory

offer rule

(4 weeks)

Further market

speculation &

stake increase

(<50%)

IV.Further stake increases

financed by speculation on

heated rumors and

additional bank loans

V.Expected fall of VW-

law: Clearing way for

profit transfer agree-

ment & consolidation

The Takeover Plan: Initially Pretending Friendly

Intentions...




0

250

500

750

1.000

Sep-05 Sep-06 Sep-07 Sep-08

VW XETRA Closing Price 3M Weighted Average Porsche Mandatory Offer Bid

80

90

100

110

120

Mar-07 Apr-07 May-07 Jun-07

4 week mandatory offer:

€100.92

Offer period ø-share price:

€109.61

May-09

Sources: Datastream, Porsche SE

…then Clearing the Road ahead by Eliminating

the 30% Hurdle…

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




…and Continuing to Finance Additional Share

Purchases with Speculation in Uncertain Markets

“(…) 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 €7.4bnrevenue. Nowadays the question arises, when the

Porsche-VW-bubble will finally burst.”

Porsche, the investment bank

Consolidated income statement of the Porsche Group

for the period from 1 August 2007 to 31 July 2008

Porsche SE Annual Report 2007/2008

Handelsblatt, 09 October 2008

Sources: Handelsblatt, Porsche SE

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




0

250

500

750

1.000

Sep-05 Sep-06 Sep-07 Sep-08

VW XETRA Closing Price

May-09

“(…) 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 $343bnmarket capitalization of Exxon Mobil. (…)”

Short sellers make VW the

world's priciest firm

Reuters, 28 October 2008

Oct-2008 short squeeze

Shareholder structure:

Porsche:

− 42.6% direct ownership

− 31.5% in equity swaps

and options

Lower Saxony:

−20.0% direct ownership

Remaining free float:

− 5.9%

Market cap on loan:

− 12.8%

# 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 sharesSources: Datastream, Reuters

The highlight of Market Uncertainty about

Porsche’s Intention: The Fall 2008 Short Squeeze




While Speculation Gains Tumble in the Crisis, ad-

ditional Stakes are Increasingly Financed with Debt

Equity

Debt

VW

126.972

23.865

103.107

Porsche

8.119

2.3245.795

VW

132.908

Porsche

45.577

16.846

28.731

167.919

35.011

161.639

Pro-Forma1

51.857

213.496

1Contribution analysis neglecting additional acquisition costs for the remaining 70% of VW shares and synergies Sources: Porsche SE, Volkswagen AG

2004A 2008A 2008A

Equity

Ratio28.6% 18.8% 37.0% 20.8% 32.1%

Debt level of Porsche in 2008 amounts to 5x the value of 2004

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




Porsche loses suit overrights 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.”

Feud threatens Porsche’sempire-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 2009China Daily, 28 November 2008

Confirmation of VW-Law – End of the road?

Sources: China Daily and Financial Times

A Speculation on the EU-enforced Fall of VW-law

to Overrule State of Lower Saxony’s Influence

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 thePorsche 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




The Outcome: By the End of FY2011, Porsche

Will be Fully Integrated into Volkswagen

53%21%

17%

9%

Ownership structure of VW-votingrights as of 31-Dec 2009

Porsche SE &

Porsche GmbHState of LowerSaxony Qatar Investment Authority Freefloat

Step I:49.9% by end of

FY 2009

Step II:100% by end of FY

2011

Volkswagen will take over Porsche in two steps:

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

Sources: Volkswagen AG, Financial Times




Implied Market Impact Function

Implied market impact function:

= −1 + 1 ∙

Free Float t+ ∙

∙ −1

With

− … Market price

− 1 and … Impact factors− … share bought in to total outstanding shares in

− …% of shares not hold by blockholders (proxy for shares available) in

Example 1 = = 1,5 SPt−1 = 100 :

− = 1% and = 40%→ = −1 + α1 ∙ 0.025 + α ∙ 0.000625 ∙ −1 = 100 + 0.0384375 ∙ 100 =

103.84

− = 1% and Free Float t = 10%

→ = −1 + α1 ∙ 0.1 + α ∙ 0.01 ∙ −1 = 100 + 0.165 ∙ 100 = 116.50




Derivation of a Call Option Delta (1/2)

Black Scholes formula for a Call-Option: = 0 ∙ 1 ∙ − ∙ ,

with 1 =

+ +

and = 1 .

The distribution function of the normal-distribution at point 1:

1 =

1

∙ ∫ −

∙

−∞ .

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

=

1

∙

∫ −

∙ =

−∞1

∙ −

= ′ 1 and

=

1

∙ −




Derivation of a Call Option Delta (2/2)

=1

2

∙ −

=1

2

∙ − −

=1

2 ∙ −

− +

= ′ 1 ∙ −

= ′ 1 ∙ −

= ′ 1 ∙ ∙

+ +

−

= ′ 1 ∙

0

∙ = ′

The Delta Δ of a Call-Option is the first derivative of the Black-Scholes formula for Calls with respect to current share price:

Δ =

0=

00 ∙ 1 ∙ − ∙

= 1 ∙ 1 + ′ 1 ∙1

∙ 0

∙ 0 ∙ − ∙ ′ ∙1

∙ 0

= 1 +′ 1

∙ − ∙ ′ 1 ∙

0

∙ ∙

1

∙ 0

= 1 +′ 1

′ 1

= 1




Porsche Managers Are Accused of Loan Fraud,

Market Manipulation and Disloyalty

Spiegel, March 06, 2012

Attorney accuses former Porscheexecutive 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 ofhaving provided false

information to banks in connec-

tion with a follow-up financing of

a loan due in March 2009.

[…] This loan was primarily used to back up call optionson 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.

[…] Härter announced he faced the allegations emphatically

“All information requested by the lender

have been provided in full“

Manager Magazin, March 11, 2012

Active Porsche manager accusedNew 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.

FAZ, March 06, 2012

Three managers suspected of fraud[…] 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.

[…] 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.

VW A Hi h P i f P h I J ifi d b S




VW: A High Price for Porsche Is Justified by Syner-

gies Minority Shareholders May Be at a Disadvantage

FTD, June 12 2012

VW needs to pay more for PorscheConditions 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.

VW S h P h A i i i R




VW Structures the Porsche Acquisition as a Re-

structuring, Saving Essentially EUR 1.5 bn of Tax

FTD, July 5 2012

VW pays a little bit of taxes for Porscheacquisition 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 paymentsof 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.

7. Porsche Versus VW

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