Piech firmly behind the wheel at VW and Porsche

July 17, 2009

However the Volkswagen-Porsche stand-off resolves itself, it looks as if Ferdinand Piech holds all the cards. That should worry VW <VOWG.DE> investors.

Just look at how things stand. VW’s chairman has an iron grip on the carmaker’s board, having struck an alliance with the unions who control half the seats on it. Meanwhile, he and some of his relatives also have a blocking stake at Porsche <PSHG_p.DE>.

Piech is in dispute with Porsche’s management and his Porsche cousins, with whom he shares control of the sports car maker. But he seems to have them in a box. Piech can stop Porsche raising money to pay down its massive 10.75 billion euro debt by issuing shares or selling assets — the possible solutions proposed by the Porsche clan. So it apparently has no alternative but to strike a deal with VW.

What does Piech want? His plan seems to be for VW to buy 49 per cent of Porsche’s sports car unit for cash, allowing the smaller company to pay off some of its debts — but leaving it pretty much as a shell company which holds a 51 percent stake in VW. Piech will then be both chairman of VW and have a blocking stake in its controlling shareholder. Nothing can be done without his consent.

Piech may seem to be beating up his own family company financially, but it would be premature to assume this. After all, his financial interests are pretty much wholly tied up in Porsche, where he is one of the biggest shareholders. By hurting it, he would be hurting himself.

There is no evidence yet that Porsche will ultimately be made to pay for its folly of attempting the debt-funded takeover of VW — a company ten times its size — which has left it in its current state. No one knows what the final terms of any deal will be. And VW has thus far only proposed the first step of what will presumably be a bigger move — a full merger with Porsche. Once Piech has control of both sides, he will have plenty of space to work out a deal that is satisfactory to his family interests.

VW’s shareholders have every reason to be suspicious. VW and Porsche are already very intertwined, with the larger company responsible for about a third of the content of Porsche sports cars. Piech is also the man who concocted the joint venture between Porsche and VW a few years ago that enabled Porsche to launch the Cayenne sports utility vehicle.

This was a huge financial success for Porsche. But VW never even disclosed the existence of the potential conflict, or what financial benefits Porsche received from the venture, in its annual report.

Can anything yet spoil this cosy arrangement? A revolt on the VW board might change things. In theory, Piech’s bloc could possibly break up, although it’s not clear what would make that happen. Piech is unlikely to upset the status quo by putting any Porsche managers into top jobs at VW. Indeed, he has already indicated that Wendelin Wiedeking, Porsche’s CEO, may be looking for a new job if and when VW and Porsche do strike a deal.

That leaves the shareholders, and particularly the state of Lower Saxony, which still owns 20 percent of VW and has certain blocking rights, to stand up to the great engineer. Lower Saxony backed away from challenging Piech three years ago when he booted out the then CEO, Pischetsreider. It will need to show more nerve if VW and Porsche do ultimately dance to Piech’s tune.

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