The VW/Porsche Saga
A look back at one of the craziest deals in the automobile industry.
The story behind the craziest deal in the automobile industry
Back in 2005, the Porsche consortium was killing it. The car business was good (the Porsche AG group was dealing with the production of the Porsche brand of cars) but the finance business was even better (the Porsche SE group owned the automobile group and traded in financial markets) while Volkswagen was going through the motions (during that time, VW wasn’t seen as a fashionable car company, and while they were producing almost double the amount of cars that Porsche was, they weren’t really making profit). It was because of this lack of revenue that VW was trading a low price, which was attracting a lot of potential buyers.
With this context in mind, on the 25th of September 2005, Porsche announced that it was paying $4.2 billion to gain a 20% stake in VW. At the time, Porsche claimed that it did this in order to protect their interests in VW and to preserve VW’s sovereignty as a car company (the two companies had a working relationship where Porsche was using VW’s platforms to build their sports cars).
At the time, it was technically impossible for VW to get acquired by anyone because of something called the “Volkswagen Rule” which stated that the local German government of Lower Saxony owned 20% of VW and could prevent anyone from buying the company without their permission. However, this law was incompatible with European Union laws that barred capital restrictions, and there was reason to believe that it would be soon repealed. When the repeal happened, it would allow prospective suitors to buy into VW. With its 20% share in the company, the repeal would also give Porsche the advantage that it would make things very difficult for another car company to buy into VW.
One year later, Porsche not only increased its stake in VW from 20% to 25% but began lobbying for the German Government to repeal the Volkswagen Rule.
Despite their actions, Porsche stated that they weren’t interested in buying VW. But when Porsche increased its holdings in VW to 29.9% in November 2006, people began questioning their motives. Suspicions grew even more when Porsche announced that they had further increased their stake in VW to 31% in March 2007.
A year later, on the 27th of October 2008, Porsche finally revealed their intentions with their actions: they had again raised its stake in Volkswagen now to 42.6%. But the big thing was that they had secretly purchased options to buy another 31.5% of VW’s shares.
Porsche now had the opportunity to own 74.1% of VW shares and were on the brink of completing a Hollywood style takeover. When they reached 75% ownership, Porsche could gain access to VW's cash reserves via a “domination clause” (a cool $12 billion) and use that (along with the “Volkswagen Rule” repeal) to buy Volkswagen outright.
But while things may have been looking rosy for Porsche, problems were arising.
Porsche may have now potentially owned two-thirds of Volkswagen but because they were buying up all these shares and driving up their market value, VW shares were trading at three times the price from when Porsche started buying them, despite the company continuing to perform poorly. In fact, the only reason why VW shares were so valuable was because Porsche was the only company buying them. If Porsche tried to sell, the share price would’ve dropped and at the same time, buying more shares in VW would become more expensive because Porsche would be driving up the price.
This scenario put Porsche in a very tough position. Because of their audacious plan to buy Volkswagen, Porsche had managed to rack up $13 billion in debt. This wasn’t an enormous amount of debt but in order to buy the rest of VW, they’d need access to a lot more funds.
The situation was worsened by the effects of the Global Financial Crisis that had hit markets in 2008 and it was looking unlikely that Porsche would be able to borrow enough money to buy up shares of Volkswagen. Almost every major bank stopped lending money and had to receive a bailout from the US Government to avoid insolvency.
The Global Financial Crisis hit Porsche particularly hard in that their core business of selling cars was badly hurt (unit sales dropped 27% in one year).
Porsche was out of money and their loan payments of $13BN were due. What was worse was that Porsche owed money to 15 different banks that helped finance the takeover.
Porsche managed to negotiate a deal wherein they refinanced most of the $13BN debt into a new loan with the condition that $4.4 BN would be paid within 6 months. But even with most of the debt refinanced, Porsche would need additional capital to pay the part of the loan that was currently due.
How ironic it must have been that VW came to their rescue and in a huge twist, Porsche went from trying to buy Volkswagen to borrowing money from them.
But as the recession and the repeal dragged on, Porsche were hemorrhaging money and were in real trouble. They were losing money, still owed money to a group of banks, and on top of that they owed VW.
The reality that Porsche would go bankrupt was looming large.
For a brief moment, it seemed that Porsches financial woes would end as the Qatar government was close to acquiring a multibillion dollar stake in the company in exchange, providing a much needed cash injection but at the last minute, they decided not to invest in Porsche until its financial situation improved.
After staying quiet for much of the saga, Volkswagens directors began mentioning their lack of confidence in Porsche.
VW then dropped a bombshell; their loan to Porsche came with the condition that Porsche would sell itself to Volkswagen; otherwise VW would force it to pay back the loan.
With no way out of their dire situation, Porsche had no choice but to concede to VW and in 2009, Volkswagen acquired Porsche for $11.3 billion and the once independent sports car maker became the VW Group’s tenth brand.