Piech must decide which car he’s driving

May 18, 2009

Alex Smith-GreatDebate— Alexander Smith is a Reuters columnist. The opinions expressed are his own —

Ferdinand Piech needs to decide whether he’s driving a Porsche, Cayenne or a VW Touareg. The Volkswagen chairman and part owner of Porsche cannot continue to drive both. He should step down as chairman and hand VW CEO Martin Winterkorn the wheel to negotiate any merger talks between the two carmakers.

Piech’s shareholding in the Porsche holding company leaves him hopelessly conflicted. However hard he tries to balance his responsibilities, Piech is always going to be left open to accusations of double dealing and almost certainly to legal challenges by minority shareholders should a deal be struck.

While the companies can’t even agree at the moment whether they are in talks or not, what is clear is that Porsche is in a real hole after its failed takeover attempt of VW left it with a 51 percent stake but 9 billion euros in debt.

Porsche is probably right about the industrial logic for a merger, but it has been in denial about the depth of its problems and therefore the strength of its negotiating position.

VW CEO Winterkorn has rightly highlighted this in a VW memo leaked over the weekend in which he calls for “full transparency” about Porsche’s financial situation — bizarre given that Piech is a Porsche board member and must know.

Winterkorn should not return to the negotiating table without Porsche fully opening its books. He owes it to VW’s minority shareholders, its workers and 20 percent shareholder Lower Saxony not to entertain a deal which would jeopardise their positions.

Porsche needs to resolve not only a huge debt burden, but also falling sales and the quandary of what to do with options on another 20 percent of VW shares. Last but not least, the Porsche and Piech families which control the company appear at odds on what is the best way to secure the company’s future.

A merger with VW looks like an “honourable” way out, but one that is fraught with difficulties in keeping all the interested parties happy. Piech is not shy about own his views. He was vocal in his criticism of Porsche’s top management team last week, adding that VW had no intention of taking on Porsche’s debt or the risks associated with its options positions in VW.

But his own fortune — his family stake is worth around 1.8 billion euros — and the future of the firm established by his grandfather Ferdinand Porsche depend on a deal being struck.

There is no real way for Piech to reconcile these competing demands. It would be best for shareholders in both companies for him to trade in the Touareg for the Cayenne.

— At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. —

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