Case Study

Porsche versus Volkswagen

Dirk G. Baur1

Kühne Logistics University (KLU)

This version: August 2015

Abstract

This case study describes Porsche’s attempt to acquire Volkswagen. It covers the
timeline of events and major press releases, the history of the two companies, their
operating and financial performances and ownership structures. The case also illustrates
the role of the state as a shareholder, the importance of financial regulation, arbitrage,
hedge funds, short-selling and market efficiency. The case is designed to stimulate students
and create a desire to dig deeper. A teaching note provides a more detailed and
comprehensive picture including possibilities for role play. The teaching note can be
obtained from the author.

1
Address: KLU, Grosser Grasbrook 17, 20457 Hamburg, Germany, email: [email protected]

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 INTRODUCTION
On September 25, 2005, Porsche announced that it seeks to acquire a share of approximately 20 per cent
in the stock capital of Volkswagen AG, Wolfsburg. Porsche states in the announcement that Volkswagen
is not only an important development partner for Porsche but also a significant supplier for approximately
30 per cent of Porsche’s sales volume. In the words of Porsche’s CEO: "Making this investment, we seek
to secure our business relations with Volkswagen and make a significant contribution to our own future
plans on a lasting, long-term basis. Porsche is in a position to finance the acquisition of the planned share
in Volkswagen through its own, existing liquidity. After careful examination of this business case, Porsche
is confident that the investment will prove profitable for both parties. […]”
The planned acquisition is to ensure that, following the anticipated abrogation of the VW Act under an
appropriate judgment handed down by the European Court of Justice, there will not be a hostile takeover
of Volkswagen by investors not committed to Volkswagen’s long-term interests. The European Court of
Justice is expected to hand down such a judgment latest in spring 2007. Porsche CEO Wendelin Wiedeking:
"Our planned investment is the strategic answer to this risk. We wish in this way to ensure the independence
of the Volkswagen Group in our own interest. This ‘German solution’ we are seeking is an essential
prerequisite for stable development of the Volkswagen Group and, accordingly, for continuing our
cooperation in the interest of both companies."2

In March 2007, Porsche announced it would increase its share in Volkswagen to 31% and hence made
a mandatory offer. The press release stated “The mandatory offer will be made to all VW shareholders after
the 30 per cent voting rights threshold is exceeded. Once this mandatory offer has been implemented, any
further increases by Porsche of its stake in VW will not trigger a renewed obligation to make an offer to the
remaining shareholders of the Wolfsburg-based car manufacturer. […] Porsche does not consider a
premium on the minimum price to be appropriate, since the price of the VW ordinary shares has already
increased by more than 100 per cent since the Stuttgart-based sports car manufacturer first acquired a stake
and the price of the VW preference shares has almost quadrupled.”

A year later, in March 2008, the Porsche supervisory board gave the company authorization to increase
the company’s share in Volkswagen to 50%.

2
Press Release http://www.porsche.com/uk/aboutporsche/pressreleases/pag/?pool=international-
de&id=b3e43599-2a23-4280-b389-7544739947b2

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 On October 26 2008, Porsche announced that it held 42.6% of VW and 31.5% in cash settled options
relating to Volkswagen ordinary shares. The statement read: “Due to the dramatic distortions on the
financial markets Porsche Automobil Holding SE, Stuttgart, has decided over the weekend to disclose its
holdings in shares and hedging positions related to the takeover of Volkswagen AG, Wolfsburg. At the end
of last week Porsche SE held 42.6 percent of the Volkswagen ordinary shares and in addition 31.5 percent
in so called cash settled options relating to Volkswagen ordinary shares to hedge against price risks,
representing a total of 74.1 percent. Upon settlement of these options Porsche will receive in cash the
difference between the then actual Volkswagen share price and the underlying strike price in cash. The
Volkswagen shares will be bought in each case at market price. Assuming the economic framework
conditions are suitable, the aim is to increase to 75 percent in 2009, paving the way to a domination
agreement. The intention to increase the Volkswagen stake to above 50 percent in November/ December
2008 remains unchanged.
Porsche has decided to make this announcement after it became clear that there are by far more short
positions in the market than expected. The disclosure should give so called short sellers - meaning financial
institutions which have betted or are still betting on a falling share price in Volkswagen - the opportunity
to settle their relevant positions without rush and without facing major risks.
In addition, the EU commission will - according to media reports over the weekend - sometime soon
qualify the new draft of the VW Act tabled by the Federal Government as not complying with EU law. It
is therefore to be expected that a new lawsuit will be filed with the European Court of Justice.
Also as a reason for today's step served the fact, that the families Porsche and Piëch, who own all Porsche
ordinary shares, have expressed their unconditioned and undivided backing of the steps taken by the
members of Porsche SE's board of management Dr. Wendelin Wiedeking and Holger Härter. As reported,
both families clearly expressed last week their support for a domination of the Volkswagen group by
Porsche.”3

HISTORY

Porsche was founded in 1931 by Ferdinand Porsche. The company was initially an automotive design
consultancy that helped carmakers design cars. The company designed the Volkswagen Beetle on behalf of
Volkswagen on the orders of Adolf Hitler.

3
Press release: http://www.porsche-se.com/pho/en/press/newsarchive2008/?pool=pho&id=2008-10-26&lang=en

Electronic copy available at: https://ssrn.com/abstract=2649141

 When Ferry Porsche, Ferdinand’s son, couldn’t find a sports car to his liking, Porsche started to build
cars on its own. Ferry Porsche founded Porsche AG (officially, "Dr. Ing. h.c. F. Porsche AG") in 1948. The
company is based in Stuttgart. In 1963, the company launched its signature model, the Porsche 911.
Porsche AG changed its name to Porsche SE in June 2007. This was accomplished when shareholders
of Porsche AG voted unanimously in favor of transferring the operating activities of Porsche AG to a
wholly-owned subsidiary.
Volkswagen was founded in 1937 and is headquartered in Wolfsburg. Its first vehicle was the Beetle.
Volkswagen is a publicly held company. The State of Lower Saxony holds 20% of Volkswagen’s shares
with voting rights.4

FAMILY
Ferdinand Porsche (1875 – 1951) had two children: Ferdinand Anton Ernst “Ferry” Porsche (1909 –
1998) and Louise Hedwig Anna Wilhelmine Maria Piëch (1904 – 1999). Ferry Porsche had four children:
Wolfgang Heinz Porsche (Chairman of Porsche Holding SE), Gerhard Anton Porsche, Ferdinand Alexander
Porsche and Hans-Peter Porsche. Louise Piëch had also four children: Louise Daxter Piëch, Ernst Piëch,
Hans-Michael Piëch and Ferdinand Piëch (CEO of VW 1993 – 2002 and VW chairman and supervisory
board member of Porsche until 2002 - 2015).
Until 2008 Porsche was a privately held company owned by the Porsche (50%) and the Piëch (50%)
families. The publicly listed shares of Porsche were “preferred shares” with no voting power.

KEY PEOPLE
“Mr Wiedeking is one of those rare beasts in the corporate jungle who have not yet had their come-
uppance. He is widely revered for his forthrightness and his leadership of Porsche, from the dark days of
near-bankruptcy in 1993 when he took over, to years of growth and glowing results today.”5
In 2008, Porsche’s CEO, Wendelin Wiedeking, was the highest paid executive in all of Germany. When
he took the position in 1993 he negotiated a bonus of 1% of the company’s annual profits. On July 23rd,
2009 Porsche announced the departure of its CEO Wiedeking and its CFO Holger Härter.

“According to rumour, Ferdinand Piëch likes to run chickens off the road in his Volkswagen Touareg.
Whether that is true or not, he certainly tends to ride roughshod over humans, metaphorically at least.

4
See VW Annual Report 2008, page 126, for further details.
5
See The Economist, March 29, 2007.

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During his long career as head of Audi, chief executive of Volkswagen and now VW’s supervisory-board
chairman, he is reckoned to have fired 30 directors.”6
In the early 1970s, Piëch struck up an extra-marital affair with Marlene Porsche, the wife of his cousin
Gerhard Porsche. Piëch left his wife and the five children for Marlene who he left after 12 years for their
27-year old nanny Ursula.
In 1988, Piëch became the CEO of Audi. By 1993, he was CEO and Chairman of the parent company,
Volkswagen. In 2002, Piëch reached the mandatory CEO retirement age of 65; while he stepped down as
the CEO, he remained Chairman and a member of the supervisory board of Porsche.

FINANCIAL AND OPERATIONAL PERFORMANCE

In 2005, Volkswagen sold 5m cars and had a market capitalization of 16bn euros. In the same year,
Porsche sold 90,000 cars and had a market capitalization of 11bn euros.
In its 2008 annual report VW states “The performance of VolkswagenAG’s ordinary and preferred
shares was widely divergent in the third quarter: although the price of preferred shares fell at the end of the
quarter, the price of ordinary shares rose sharply.”
Porsche’s 2008 profits exceeded the revenues from car sales. However, Porsche reported 9bn euro of
debt compared to 9.4bn euro cash holdings reported by VW.
On October 20, 2008 the financial publication Barrons published a story about VW titled “The World’s
Most Overvalued Stock” and concluded the article stating: “VW's trading brings to mind the classic lyric
wisdom: ‘The fundamental things apply, as time goes by.’ When VW's fundamentals come to the fore, the
gravity-defying stock will come hurtling back to earth.”

The global financial crisis which erupted with the bankruptcy of Lehman Brothers in September 2008
hit Porsche both operationally and financially. Porsche’s core business of selling cars was affected by with
unit sales being 27% lower in one year. Moreover, banks became more cautious and were more reluctant
to lend or to rollover existing debt. This severely affected Porsche which had accumulated a significant
amount of debt.

In May 2009 Porsche drops the Volkswagen takeover plan and says it will instead pursue a merger with
Europe's largest auto maker. VW Chairman Ferdinand Piëch says Porsche must get its 9 billion euro debt

6
See The Economist, November 30, 2006.

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under control before any deal can be agreed. Porsche confirms it received a 700 million euro loan from
VW.

SHORT SQUEEZE
“Porsche's gambit was as old as finance itself. For about three years it had been steadily increasing its
stake in VW, a much larger yet less profitable carmaker with which it shares a little production. Its buying
had driven up the price of VW's shares to above the level at which it would make any economic sense for
Porsche to buy VW. Seeing this, hedge funds sold shares in VW that they did not own. One strategy was a
bet that VW's share price would fall. Some also bought shares in Porsche, in a wager that shares of both
would converge. […] Adam Jonas of Morgan Stanley warned clients on October 8th of the danger of
playing “billionaire's poker” by betting against Porsche.”
Porsche’s announcement on October 26th, 2008, saying that it owned nearly 43% of VW's shares outright
and had derivative contracts on nearly 32% more meant it had tied up almost all of the freely available
shares. Hedge funds concluded that they could be caught in an “infinite squeeze” in which they were forced
to buy shares at any price. Their buying sent VW's share price soaring briefly making VW the world's most
valuable company. [see Exhibit 1] Porsche may have made paper gains of €30 billion in what one analyst
described as “one of the most brilliantly conceived wealth transfers ever.”7 Godfrey (2015) emphasizes that
the price discovery of VW shares evolved over two days following the announcement on October 26 (see
Exhibit 2).
As a result of the short squeeze, Porsche announced to settle VW options amounting to up to 5% of the
ordinary shares which led to a significantly lower share price. Deutsche Börse also reacted to the short
squeeze with an extraordinary reweighting of the 30 companies in the DAX lowering the weight of VW
from 27% to 10%.
In January 2010, a group of investment funds sue Porsche SE, W. Wiedeking and H. Härter accusing
them of fraud in a "short squeeze". The funds argue that Porsche “actively concealed information” and were
“releasing false and misleading communications into the market”. The filed lawsuit notes that “Wiedeking
and Härter were experienced and active traders of derivatives, and beginning in 2002 they had dramatically
reorganized Porsche’s treasury operations to include a substantial derivatives function.[…] In the fiscal
year ending July 31, 2008 […] €7.6 billion was generated by Porsche’s trading in derivatives.” (page 37,
115). It is also argued that the “design to takeover VW, with classic ‘David vs. Goliath’ maneuvering, gave
[Wiedeking and Härter] a strong motive to manipulate the market of VW stock through the short squeeze

7
See The Economist, October 30, 2008.

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scheme. […] to be successful in their attempt, they needed cash, and lots of it. The manipulative scheme to
execute the short squeeze gave [Wiedeking and Härter] quick access to the vast amounts of cash they needed
to support their desire to seize control of VW.” (page 36, 122).

ROLE OF THE STATE

The German Chancellor Angela Merkel says in late September at a VW gathering attended by more
than 15,000 VW workers “The government stands behind VW.” And adds that she is also driving a VW
Golf. She concludes her speech by stating that the people in the North of Germany (where VW is based)
are as skilled as the people from the South (where Porsche is based) and even speak better German.8
In early 2009, it is reported that the Qatar Sovereign Wealth fund was close to acquiring a multibillion
dollar stake in the company in exchange for cash to pay down the debt. However, the deal appears to be
delayed and Qatar only provides cash at a later stage to Volkswagen.

FINALE
In late 2009, Volkswagen acquires the Porsche automotive business for 8bn euros in cash. The Porsche
family retains their shares in a holding company that owns 50% of Volkswagen (see also Exhibit 3).

8
A well-known advertising company of the state of Baden-Wuerttemberg claims that the people of that state are good
at everything except speaking dialect-free German. ("Baden-Württemberger können alles, außer Hochdeutsch. Sie
hier im Norden können Hochdeutsch – und alles andere noch dazu.") (Die Zeit 24. 9. 2008).

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References
Godfrey, K.R.L. (2015), Detecting the great short squeeze on Volkswagen: Regional price variation and
limits to arbitrage, Working Paper University of Western Australia

Businessweek Porsche‘s King Looks to Expand Empire (Dec 2006)

http://www.bloomberg.com/bw/stories/2006-12-06/porsches-king-looks-to-expand-empirebusinessweek-business-news-
stock-market-and-financial-advice

Financial Times Man in the News: Ferdinand Piëch (March 2008)

http://www.ft.com/intl/cms/s/0/8c5945c6-ec6b-11dc-86be0000779fd2ac.html?siteedition=intl#axzz3SmCThQMi

The Economist
From David to Goliath (May 2007) http://www.economist.com/node/8934965
Squeezy Money (October 2008) http://www.economist.com/node/12523898
Payback for Piëch (May 2009) http://www.economist.com/node/13649071
Exit Wiedeking (July 2009) http://www.economist.com/node/14087859

Wall Street Journal

Porsche Gains Nearly 75% of VW, Tightening Grip (October 2008)
http://www.wsj.com/articles/SB122506315406770367
Porsche's Chief Ousted, Easing Way to VW Deal (July 2009)
http://www.wsj.com/articles/SB124832455323475045

New York Times Porsche Planning Still Larger Role in Volkswagen (Dec 2006)
http://www.nytimes.com/2006/12/07/automobiles/07porsche.html?fta=y&_r=0

Die Zeit Applaus für Merkel (September 2008) http://www.zeit.de/2008/40/VW-Merkel

Reuters Timeline – Porsche‘s pursuit of Volkswagen (Jan 2011)

http://www.reuters.com/article/2011/01/03/porsche-vw-idUSLDE7020VH20110103

Bloomberg Ex-Porsche CEO must stand trial over failed VW takeover (August 2014)
http://www.bloomberg.com/news/articles/2014-08-26/ex-porsche-ceo-wiedeking-to-be-tried-for-vw-share-manipulation

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Exhibit 1: Share prices Volkswagen ordinary shares and Porsche preferred shares

1000 180

900 160

800
VW Porsche 140

700
120

600
100
500
80
400

60
300

40
200

100 20

0 0
2/1/2005 2/1/2006 2/1/2007 2/1/2008 2/1/2009

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Exhibit 2: VW Share price October 24 – 31, 2008

1000

900

800

700

600

500

400

300

200

100

0
10/24/2008 10/25/2008 10/26/2008 10/27/2008 10/28/2008 10/29/2008 10/30/2008 10/31/2008

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Exhibit 3: Statistics March 2015

Volkswagen Porsche
Market capitalization €105.6bn €12.7bn

Shares outstanding 295.09m 153.1m

Share price € 220 € 82

Cars sold in 2014 10,000,000 190,000

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Exhibit 4: Ownership structure 2011 (after merger)
50.7% of Volkswagen is privately held by the Piëch (50%) and Porsche (50%) families. 20% of
Volkswagen is held by the State of Lower Saxony, 17% by Qatar Holding and 12.3% by other (smaller)
shareholders.

Source: ausmotive.com

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