Porsche & Volkswagen Relationship

Market Update:

This past week has continued the stock market optimism. It has seen the VIX drop back near historical lows, showing low downside volatility; and the 10 year US yields hitting new year highs, showing the movement of money into the markets and away from “safe haven” treasuries. In addition, people are watching the newly appointed BOJ governor, Kuroda, who is expected to pursue aggressive monetary policy. In Europe, Italy’s debt was further downgraded by Fitch and Mooney. One negative sign did come out of the weekend, as China’s retail sales and industrial output had the weakest start since 2009, creating worries over a possible economic slowdown. In Washington, a budget deal has yet to be made, and the sequester period continues.

Porsche and Volkswagen Relationship, Trials Moved:

 In March 2007, Porsche bough 31% of Volkswagen stock by using cash settled options. Porsche said they did this to ensure that Volkswagen was not taken over by rival car companies, or investment firms, because there was speculation around that time of a possible takeover of Volkswagen. But there is a German law that protects Volkswagen from any takeovers, by allowing any shareholder with more than 20% of the voting rights, to have veto power over any corporate decision in the annual general meeting.

Buying all of this Volkswagen stock, Porsche was able to record recorded profits. Only 1 billion euros of their profit came from selling cars. While 6.8 billion euros of profit came from trading stocks. At that time they were taking a huge amount of risk by only limiting their portfolio to primarily only one stock. But while other companies needed bail outs during the recession, Porsche was able to continue its profits. But in March 2008, Porsche stock took a drastic dive when they announced that they were going to increase their stake in VW to more than 50%.

 In 2009 the tables began to turn as Volkswagen, began buying the crippled Porsche stock. Throughout that year, Volkswagen would acquire 49.9 percent of Porsche stock, at a cost of 3.9 billion Euros. In 2012, Volkswagen announced to buy the remaining shares of Porsche for a price of 4.5 billion euros, but were also forced by regulators to assume 2.5 billion of Porsche’s debt. The deal was structured with the transfer of a single share, to allow for it to be classified as a reorganization, allowing for a loophole in Germany taxes. This tax aversion is still a matter of debate in Germany.

 This past week, the Porsche corruption was brought back into the focus, as 26 global Hedge Fund companies have dropped their NY Supreme Court filing against Porsche for an amount of $1.4 billion , arguing they cornered the VW stocks. However, the same hedge funds have kept their filing on the same issue in the German courts.

Looking back, we see a major dip in both VW and Porsche’s stock prices during the recession of 2007 and 2008. However, in Porsche we see an additional drop due to its excessive risk taking in VW’s stock. Since the recession, VW has done well seeing great growth, and reported in late February record 2012 profits of $16 billion, higher than all other automakers. On the other hand, Porsche stocks are still near lows, even following successful growth in the past year.


Links: http://www.nytimes.com/2012/02/25/business/global/volkswagen-reports-record-profit.html?_r=0 http://www.reuters.com/article/2013/01/31/us-porsche-lawsuit-us-idUSBRE90U18420130131 http://www.businessweek.com/news/2013-03-06/porsche-appeal-by-hedge-funds-dropped-for-case-in-germany http://press.porsche.com/news/release.php?id=451 http://www.huffingtonpost.com/2012/07/04/volkswagen-porsche-merger-vw_n_1649854.html