Published February 7, 2012, Los Angeles Daily Journal – How could everything go so wrong when all was supposed to be so right? The year was 2008, and legendary sports car manufacturer Porsche was in its zone. The iconic 911 was more popular than ever, and with the addition of a sports utility vehicle and a soon-to-be-released sports sedan, the company had successfully transitioned from role of specialty niche manufacturer to fully developed global powerhouse.
And, the car maker was far from done. With architecture being drawn for the 918 Spyder and the 911 GT3 R Hybrid, Porsche sought to bring hybrid technology to the supercar world – something that would forever change the landscape of the sports car market. Porsche hoped that the “halo” effect of these two products would propel the company to record sales figures, stating that its goal was to double its annual output to 200,000 units. For a company that had never sold more than 97,000 cars, a mighty goal indeed.
As Porsche’s success continued, its confidence beamed, leading to out of this world ambition. In 2008, with a recent track of remarkable achievement, the company embarked upon an undertaking so enormous that any misstep could result in the company’s demise. That year, Porsche sought to execute a hostile takeover of automotive juggernaut Volkswagen – a company 16 times larger than Porsche and well-placed in German politics.
With $151 billion in annual sales and 9 marquee brands, the Volkswagen group was Europe’s largest car maker and prized jewel of the German government. Once owned entirely by the government, the German state of Lower Saxony retained a 20 percent ownership of the company, and enacted a law specific to Volkswagen which gave it unlimited veto power over any proposed corporate action.
Porsche began the takeover by secretly buying up hoards of Volkswagen stock. As Volkswagen shares began to thin, speculation swirled on who was behind the raid – and Porsche denied any involvement. Yet, on October 26, 2008 Porsche revealed that it had acquired 75% of Volkswagen’s stock – leaving a mere 5% available for the public market – resulting in a “short squeeze” of historic proportions.
With speculators around the world betting that the price of Volkswagen stock would decline, the sudden news of the Porsche takeover caused the stock price to soar, and investors who had shorted the stock (or bet on its decline) scrambled to cover their positions. As few shares were available for the surging demand, the price of Volkswagen’s stock quadrupled within days to over €1,000 ($1,300) per share – making Volkswagen the world’s most valuable company virtually overnight.
Yet, Porsche’s quest to overtake Volkswagen was marred with miscalculation. Porsche had spent some €14 billion ($18 billion) in cash buying Volkswagen stock, and when its cash reserves ran dry it took on €10 billion ($13 billion) in debt to finish the acquisition. Porsche had counted on being able to access Volkswagen’s massive cash reserves to repay the debt, yet when the credit markets seized up the banks began demanding immediate repayment. The situation turned into a full-scale crisis when the German state of Lower Saxony vetoed Porsche’s access to the stockpile of cash, leaving the company with billions in debt.
With Porsche unable to service its debt, Volkswagen saw this as an opportunity to turn the tables on the would-be raider and add Porsche as a tenth brand to its automotive group, which already included Audi, Bentley, Bugatti and Lamborghini. Hence, in August 2009 Volkswagen paid €3.9 billion ($5 billion) for 49.9 percent of Porsche’s auto-making business, and an option to purchase the rest, with the final merger decisions to be made by the end of 2011.
As the deadline for merger decisions neared, claims against Porsche of stock manipulation began to mount – causing Volkswagen to slow its enthusiasm for a fully-integrated merger of Porsche’s global operations. Then on December 31, 2011, a pair of lawsuits brought by institutional investors were filed in Germany, seeking €4.8 billion ($6.2 billion) from Porsche for stock manipulation. And, the claims may have merit. Previously, German prosecutors had raided Porsche’s headquarters in Stuttgart, Germany, seeking information related to market manipulation of Volkswagen shares.
Institutional investors have also filed suit against German President Christian Wulff for €1.8 billion euros ($2.3 billion) for his role in the events. Prior to his election in June 2010, Wulff served as the premier of state for Lower Saxony and on Volkswagen’s board of directors. As a key decision maker for the company, investors are alleging that Wulffknew of Porsche’s stock manipulation and failed to protect their interests.
Amidst the swirling legal issues, Volkswagen chief executive Martin Winterkorm said last month that a fully-integrated merger with Porsche now “isn’t possible,” suggesting instead that Volkswagen may simply buy the remaining 50.1 percent interest in the car-making unit, and roll it into its global operations. Without such a deal, it is not clear just how long Porsche can survive – or at least continue to flourish.
In a world of consolidated roll-ups, it is sad to see one of the few remaining great independents topple into amalgamation. Ferrari is now owned by Fiat; Rolls Royce is owned by BMW – and it appears that Porsche will soon follow suit. But with each roll-up, a piece of what made the company great inevitably dies. Lamborghinis now use Audi engines and Maseratis now use Chrysler parts, and with that they sacrifice an indispensable part of their heritage and soul.
For many, Porsche is the embodiment of all that is right in the sports car world. A car that never should have made it, and yet refuses to quit. It is the standard against which all competitors are judged, and is as much loved for its quirkiness as it is for its perfection. The key is in the wrong place, the engine is at the wrong end, yet it is the car’s eccentricity that causes grown men to swoon and little boys to dream. One can only hope that with the pending roll-up into the Volkswagen conglomerate, the company can retain a piece of its DNA.