Porsche Et VW 2

Nolte, Heike
Other Persons: Wright Butcher, Alva
Working Paper
Volkswagen and Porsche : One Family, Two Car
Companies, & a Battle for Corporate Control
Provided in Cooperation with:

Social Science Research Network (SSRN)
Reference: Nolte, Heike (2012). Volkswagen and Porsche : One Family, Two Car Companies, &
a Battle for Corporate Control. [S.l.] : SSRN.
https://ssrn.com/abstract=1996386.
https://doi.org/10.2139/ssrn.1996386.
doi:10.2139/ssrn.1996386.
This Version is available at:

http://hdl.handle.net/11159/139046
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Volkswagen and Porsche
One Family, Two Car Companies, & a Battle for Corporate Control
Dr. Heike Nolte

University of Applied Sciences Emden-Leer
Constantiaplatz 4
26723 Emden, Germany
Tel: +49 4921 807 1007
Fax: +49 4821 807 1228
heike.nolte@hs-emden-leer.de
Dr. Alva Wright Butcher

School of Business and Leadership
University of Puget Sound
1500 N. Warner St. #1032
Tacoma, WA 98416-1032
Tel: 253- 879-3349
Fax: 253-879-3156
butcher@pugetsound.edu
Supported by a 2011 NIBEN Curriculum Development Grant

September 2011
Volkswagen and Porsche:

One Family, Two Car Companies, & a Battle for Corporate Control Page 1
Electronic copy available at: http://ssrn.com/abstract=1996386

Introduction
Over the past several years, Porsche and Volkswagen have been involved in a saga that is stranger
than fiction. It started by the attempt of the small car manufacturer Porsche to take-over Europe's
biggest auto firm Volkswagen and finally turned Porsche into Volkswagen's "brand # 10". On the
way, hedge-funds lost a fortune, Porsche earned more revenues from financial transactions than
from producing cars, one part of the IG Metall union fought against another part of the same union,
the German parliament passed a law which was very similar to a law that had been dismissed by the
European Union Court of Justice. How could this saga of events happen? What led to a complete
turnaround in this battle for corporate control? Figure 1 presents a timeline of some of the key
events in this takeover battle.
History
Volkswagen – the Peoples Car
In 1934, Hitler announced that he wanted the German automobile industry to build an affordable car
for the people. He wanted a car that could seat four people, get 40 miles to the gallon, and cost no
more than 1000 Marks (or around $250).1 The engineer who submitted the best design and was
awarded the contract was Ferdinand Porsche. A new firm was founded whose only purpose was to
produce the common people’s car, the “Volkswagen”. Porsche was appointed to the supervisory
board, while his son-in–law, Anton Piëch, became the first manager of the new production site,
which was located in a newly founded town in the center of Germany, today known as Wolfsburg.
This town is still the firm’s headquarters. The plant was almost completed when World War II
started in fall 1939. Instead of producing cars, the facility was converted to war production, and it
was not until the end of the war that the first Volkswagen was built. By this point Wolfsburg and its
auto production plant was under control of the British occupational forces. The British helped to
start the production of the Volkswagen Beetle, even though the patents were still held by Ferdinand
1
About.com Classic Cars, Retrieved from http://classiccars.about.com/od/classiccarsaz/a/volkswagen.html


Porsche’s engineering firm. Figure 2 presents one of the first advertisements for Volkswagen. At
that time it had the Nazi name, KdF-Wagen. The text in the 1939 advertisement translates as “5
marks a week you must save if you want a car of your own.”
The financial side of the Volkswagen story began even earlier than its engineering and production.
The company was financed by union assets that had been seized in 1933. Although a savings plan
had been set up to help working class households purchase a car, most of their savings were lost
during the war. In 1949 the British occupational forces handed Volkswagen over to the state of
Lower Saxony, where the factory was located, and ruled that the state should govern Volkswagen
together with the other states of the new Federal Republic of Germany. The unions also obtained a
governance role as compensation for their assets that had been seized in 1933.
Porsche
Porsche, the firm widely known as a sports car manufacturer today, had been founded by Ferdinand
Porsche in 1931 as an engineering firm. Towards the end of World War II, Anton Piëch, the top
manager of Volkswagen, transferred capital from Volkswagen to Austria and paid bills for the
Porsche engineering firm from this account until the fall of 1945.2 In 1948, the son and son-in-law
of Ferdinand Porsche, Ferry Porsche and Anton Piëch, met and established the following three
agreements which enabled Porsche to start production of sports cars, even though it had very small
facilities.3
• Porsche would receive income from a licensing fee of five German marks for each Beetle
produced until 1955,
• Volkswagen would supply parts for the production of Porsche’s sports cars,
• Porsche would be the authorized dealer for Volkswagen cars in Austria.
2
Mommsen & Grieger (1996)
3
Hawranek (2009)

Ferry Porsche designed the firm’s first car, the Porsche 356. Although its body was an original
design many Volkswagen parts were used to save costs. The original car was fast and very light
weight, gaining attention by taking first place in the Innsbruck city race. Production was
transferred from Austria to Stuttgart in 1950. The firm focused on performance and continued to re-
engineer and refine the car. By the late 1950’s the Porsche 356 utilized far fewer parts from
Volkswagen. Figure 3 shows a 1951 split windshield 356 Cabriolet.
Porsche/ Piëch Families
The history of Porsche and Volkswagen is intertwined with that of the Porsche and Piëch families
and the feuds between them. In order to avoid disputes the Porsches and Piëch’s decided in 1972
that no family members would be permitted to take an active role in the management of Porsche,
even though the two families owned 100% of the voting stock. Because of this, the promising
Porsche R&D engineer Ferdinand Piëch, son of Anton Piëch, moved his career to Audi, one of
Volkswagen's subsidiaries. He ultimately rose to the position of CEO of Volkswagen. Later, when
the takeover battle was poised to begin, Ferdinand Piëch was the chairman of the Supervisory Board
of Volkswagen and his cousin, Wolfgang Porsche, the son of Ferry Porsche, the chairman of the
Supervisory Board of Porsche.
Porsche’s Financial Strategy
In 2005, although Porsche had cash reserves of more than three billion Euros, the firm’s small size
restricted the development of new technologies, especially those expected to be required by new
regulations to reduce pollution and fuel consumption. The CEO of Porsche, Wendelin Wiedeking,
wanted to have access to Volkswagen’s technological expertise, manufacturing capabilities, and
cash reserves. In March 2005 he proposed that the Porsche/Piëch families take over control of
Volkswagen. The CFO of Porsche, Holger Härter, devised a complex plan to gain a large stake in

Volkswagen. A key feature of this plan was the use cash settled options to avoid German disclosure
regulations. The families eventually agreed.
Options
An option is a financial derivative that provides its owner the right but not the requirement to
exercise or complete the specified contract. In this case Porsche held call options that gave it the
right to buy Volkswagen stock at a price specified in the contract, called the exercise or strike price.
There is a small upfront cost to buy the option contract, and the contract also has a specified time
period over which it is valid. If the market price is less than the option exercise price, then the
owner of the option would choose not to exercise the option but instead buy the stock in the market.
This would mean losing the purchase price of the option. If the market price exceeds the exercise
price, the owner would use the option to buy at a lower price, and the savings would represent a
return on the investment of buying the option at an earlier time.
Cash Settled Options
Most option contracts listed on U.S. exchanges are cash-settled contracts. In a cash-settled contract
the seller of the option does not deliver the actual underlying asset, but transfers the associated cash
position. That is, rather than exercising an option, its owner simply receives from the seller the cash
equivalent of its value.
Disclosure Regulations
There are regulations in both Germany and the United States that require a party holding a large
position of shares in a corporation to disclose its position. The purpose is to provide some
forewarning to firms about potential takeover attempts. In the United States, Regulation 13D
mandates the disclosure of a stock ownership position greater than 5%. Under German law, the

Transparency Directive Implementation Act of 2007 requires disclosure of a position by parties
holding shares and financial instruments to which voting rights are attached. However, cash settled
options are not regarded as financial instruments under this directive. Thus although the market
was aware of Porsche’s position in Volkswagen common shares, it was not aware of its position in
cash settled options.
The Classic Short Squeeze
Within a space of two days in late October 2008, Volkswagen's shares rose from €211 to a high of
€1005. For a brief period Volkswagen was the most valuable company in the world. Figure 4
illustrates the dramatic increase in the price of Volkswagen’s shares. The factors behind this
startling increase are rather unique. It was no secret that Porsche was buying Volkswagen shares.
This was first announced in 2005 and had been reiterated several times since then. What the market
did not know was the extent of Porsche’s indirect ownership. Porsche’s press release on Sunday,
October 26, 2008 stated that Porsche held 42.6% of voting shares in Volkswagen. The real surprise
was that it also held an indirect ownership position of 31.5% via cash settled options for
Volkswagen shares. . Since the state of Lower Saxony held 20.3%, this meant the only 5.6% of
Volkswagen voting shares remained in circulation.
To further complicate matters, many investors held short positions in Volkswagen stock. In October
2008, the press resounded with stories about problems facing the automotive industry. Many
investors expected Volkswagen stock to decline and had sold Volkswagen stock short. In a short
position, an investor who anticipates a drop in Firm XWY’s stock borrows Firm XWY shares from
another party and sells them in the market place. The intention is to buy those shares later at a
lower price and return the borrowed shares. The hitch is, what happens if the price of Firm XWY’s
shares increases? Unfortunately for the short sellers, this was true in Volkswagen’s case. Suddenly

short sellers were scrambling to buy Volkswagen shares to cover their positions. Because of the
limited number of Volkswagen shares that remained in circulation, demand far exceeded supply and
the price of Volkswagen’s shares skyrocketed.
Hedge Funds Cry “Foul”
Hedge funds that had short positions in a bet against Volkswagen stock lost billions of Euros in a
few hours. The financial loss led to an even more tragic personal loss. A German railway worker
discovered the body of Adolf Merckle near a commuter train line. Merckle’s family holding
company had lost hundreds of millions of Euros in the short squeeze. Porsche was accused of
misleading the market about the position it intended to take in Volkswagen. In March, Porsche had
stated that the probability of a 75% position was very small. Even as recently as October 2008,
CEO Wiedeking had said that it would keep open the possibilty of a 75% stake, but that it was a
“purely theoretical option.”4 Porsche vehemently denied that it was manipulating the market.
Porsche Hedge Fund or Auto Manufacturer?
A few days after shocking the market with its indirect ownership position, Porsche announced that it
would sell up to 5% of its Volkswagen shares. The stated intention was “to further avoid market
distortions and the resulting consequences.”5 The notion that Porsche would now earn billions of
profits on its cash settled options increased the wrath of market participants. An analyst at Sanford
Bernstein, Max Warburton, noted that “Porsche are set to shock the financial community yet again
by making money – lots of money – out of this situation.” A UK investment firm, F&C
Investments, complained to Germany’s security regulator, Bafin, that “if no action is taken the
credibility of German corporate governance in the international investment community will suffer
as a result.”6 Bafin began a formal investigation of market manipulation but some noted that this
4
Zucherman and Esterl (2008)
5
“Wild ride” (2008)
6
Milne (2008)
investigation lacked political support.
The controversy was fueled to even higher levels by Porsche’s announcment that in the fiscal year
ending in July, it had made €6.8 billion from its trades in Volkswagen options and only €1 billion
from selling cars. Porsche was being called one of the most successful hedge funds in the world.
An analyst at Credit Suisse, Arndt Ellinghorst, wryly noted, “If they now increase their stake to
more than 50 percent and cash in the remaining 25 per cent of the options, they would make hedge
funds and banks pay for the whole takeover.”7
Porsche’s Control Strategy
Porsche was relying on two key factors to complete its acquisition of Volkswagen. One was the
ability to acquire a large position using cash settled options without having to alert the market to its
ownership position. The second was the repeal of the Volkswagen Act.
The Volkswagen Act and Voting Rights

In general, the German Stock Companies Act ("Aktiengesetz") calls for a majority of 75% of the
shares to approve fundamental issues such as mergers and acquisitions. However Volkswagen had
been exempted from this rule because of its unique history as the producer of the car of the people
and its role as the symbol of the economic recovery of Germany after World War II. In 1960 the
German federal parliament passed the "Volkswagen Act" which affirmed that Volkswagen guarded
workers’ rights more diligently than other firms and sought to protect the interests of the state of
Lower Saxony. One aspect of the act was the requirement that the establishment or closure of
production sites required two thirds of the votes on the supervisory board. In general, on
supervisory boards of larger firms in Germany, half of the votes come from workers'
representatives, the other half of the owners. A key feature of this act limited the voting power of
7
Schafer (2008)
each shareholder to 20%, even if the ownership position was greater than 20%. For mergers,
acquisitions or the sale of the firm the Volkswagen Act specified that 80% of the votes were
necessary - instead of 75% called for by the German Stock Companies Act. Since the federal state
of Lower Saxony owned 20.3% of the voting shares, this meant that Volkswagen was practically
immune against hostile takeovers. However Wiedeking and the other top-level managers of
Porsche were counting on the repeal of the Volkswagen Act.
One of the basic principles of the European Union (EU) is the free movement of capital. Each
member state has commited itself to establish no barriers to ownership from other member states.
One form of special voting rights that had been practiced in Europe was Golden Shares. A “Golden
Share” signifies the right of one shareholder to outvote the other shareholders, even if s/he
represents a minority. Typically, these special voting rights are guaranteed to the government in
former state-owned firms after privatization. The EU Court of Justice had ruled against Golden
Shares in several cases. The EU Commission decided in October 2004 to challenge the Volkswagen
Act and the official petition against the Volkswagen Act was submitted in March 2005. The EU
Court of Justice ruled on October 23, 2007 that the limitation of the voting power of each
shareholder to 20% and the requirement of an 80% approval for changes in corporate control
contradicted EU principles. In addition the EU Court of Justice ruled that the Volkswagen Act
provision that allowed the Federal and the State governments to have two seats on the supervisory
board, as long as they own at least one share, also contradicted EU principles.8 This decision had
been expected since February 2007. Porsche was jubilant. As Volkswagen’s largest shareholder,
now Porsche would be able to fully exercise its voting rights. It looked as if the path was finally
clear to take over Volkwagen!
Once an EU court ruling has been made the member states must adjust their laws. Instead, the
8
Retrieved from http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=DE&Submit=rechercher&numaff=C-112/05.
German parliament presented a revised Volkswagen Act on May 27, 2008, which was very similar
to the one that had just been dismissed by the European Court. On June, 5th, 2008 the European
Commission opened infringement proceedings against Germany because it had not complied with
the court ruling. In November 2008 the EU Commission gave the German government a deadline of
two months in order to eliminate the 20% blocking minority in the new Volkswagen Act. In spite of
this, the parliament passed the revised Volkswagen Act on November 13, 2008; it became law on
December 8, 2008, after the second chamber had also passed it. According to the new act, the
federal and state governments were no longer guaranteed seats on the supervisory board. But the
provision that 80% of the shares were necessary in order to decide about mergers or sale of the firm
remained, as well as the rule that two third of the votes on the supervisory board were necessary in
order to decide about production sites. Since the federal state of Lower Saxony owned 20.3% of the
voting shares, this meant that politicians still had a veto in decisions about mergers or the sale of the
firm.
The 2007 ruling of the EU Court of Justice dismissing the Volkswagen Act caused an uproar among
worker representatives of Volkswagen. The chief of the Volkswagen Works Council, Bernd
Osterloh, opposed the ruling. According to Reuters, he said that this made Volkswagen “the victim
of a raging neo-liberal mainstream” within Europe. 9 Volkswagen workers held rallies and appealed
to a German court against a plan by Porsche to weaken their position on the Supervisory Board.
Members of local works councils of Volkswagen plants all over the country met with their
representatives in parliament. Uwe Hück, head of the Porsche Works Council, organized mass
demonstrations. Even though the two Works Councils were part of the same union, they had
opposite positions on the Volkswagen Act. Piëch, the head of Volkswagen’s Supervisory Board, and
Winterkorn, Volkswagen's CEO, remained silent. On the other hand, Wendelin Wiedeking, the CEO
of Porsche, applauded the EU Commission’s support and noted “We have some friends in Europe.
9
Landler ( 2007)
The European Commission is on our side.”10 Talks between union officials and politicians on the
state, federal and European Union levels were organized. However, the two month deadline of the
EU Commission passed without any consequences.
In October 2007, it looked as if the way was clear for Porsche to takeover Volkswagen. The
Volkswagen Act had been revoked by the EU Court of Justice. Porsche had announced that it had
the funds available to acquire the 75% of Volkswagen’s voting shares necessary for control.
However, by November 2008, the tables had shifted against Porsche. Unless Porsche could reach
some agreement with Lower Saxony, its operational control over Volkswagen was limited. In
addition, Porsche was faced with weak car sales and a huge debt burden. The global recession and
tight credit markets made it very difficult for Porsche to refinance its loans. Porsche’s operational
control was also limited because of the corporate governance roles of labor unions, works councils,
and supervisory boards in a stakeholder economy.
Shareholder versus Stakeholder Economies
This Volkswagen-Porsche takeover battle took place in Germany, which is a stakeholder economy.
Frits Bolkestein, a high EU representative, once described a stakeholder economy as a“regulated
market economy with a comprehensive system of social security” where “the welfare state is
combined with a so-called ‘consultation economy'.”11. The stakeholder perspective emphasizes the
interests of various groups such as, shareholders, employees, suppliers, customers, the government,
and the community in which the firm is active. Management tries to balance the interests of all
stakeholders and frequently consults with them. There are even legal requirements which guarantee
a say for specific stakeholders. Since the interests of other stakeholders are not necessarily
congruent with shareholder interests, typically there is less of an incentive for investors to purchase
10
Benoit, Milne, Tait (2008)
11
Bolkestein, Frits. (2000, December 5). The future of the social market economy. Speech presented at the Konrad
Adenauer Stiftung, Brussels, Belgium.
shares in a firm that must balance the interests of all stakeholders. These firms therefore rely more
heavily on banks for financing.
Stakeholder economies favor long-term relational contracts. A key pre-requisite for these contracts
is trust between the business partners. In contrast to contracts in a legal sense the written word is
less important, the reputation and reliability of the business partner count more. In a relational
contract, a key cost of breach of contract is the threat of damage to your reputation as a reliable
business partner. Since this would greatly impact future business opportunities, breach of relational
contracts is relatively rare.
Germany’s stakeholder economy differs tremendously from shareholder economies. The
perspective on organizational purpose used in the United States as well as in other common law
countries is shareholder value. Advocates of this perspective view pursuing shareholder interests as
the primary purpose of a firm. Firms in shareholder economies tend to focus on maximizing profits
which sometimes leads to a more short term focus. Contracts in shareholder economies require the
disclosure of any information which might impact the probability of being profitable. Transparency
is extremely important. Stakeholder firms also focus on profit but typically with a longer term
horizon because of the long-term relational contracts. Since trust is a key component of relational
contracts, transparency is not that important.
Corporate Governance in a Stakeholder Economy
Stakeholder economies, such as Germany, have implemented a legal system to balance the different
stakeholder interests. The rules regarding co-determination at both the factory and the enterprise
levels are crucial. Labor unions, works councils, and supervisory boards are important participants
in corporate governance.

Labor Unions
Germany follows a dual channel system of worker representation, with the big unions organized by
industry and region, meaning that they act independently of specific firms. Employees of Porsche
and Volkswagen are members of different regional chapters of the same union, IG Metall, one of the
world's largest. Nearly everyone who works at Volkswagen or Porsche, including management, is a
member of this union. In contrast to the system in the U.S., a German firm is not either "unionized"
or "non-union". The individual worker becomes a member; the colleague working next to him/her
might decide not to join the union. Only the members pay union fees. The main function of the
union is to negotiate labor agreements with employers associations. Some large firms, such as
Volkswagen, have their own separate agreements with the union. In general, these agreements
become valid for everybody working in the firms whether s/he is a union member or not. Although
the compensation of executives and higher level managers are not covered by the labor agreements
negotiated by the unions, in some industries the salaries of middle managers can be based on them.
This is the case in the car industry. While unions have no formal say within firms, their other key
responsibilities are to act as lobbyists for labor interests with management and with lawmakers and
to consult with workers' representatives on the works councils and supervisory boards.
Works Councils
Everyday representation of the workers' interests in a firm of at least five employees is the
responsibility of the works councils ("Betriebsrat"). Their members are independent from unions
and speak for all employees of one workplace, including lower and middle management, whether
they are members of a union or not. The members of the works councils are elected every four years
by the employees at each production site. If a firm has several locations, a more comprehensive
works council ("Gesamtbetriebsrat") is set up in addition to the local ones. If management decisions

regarding personnel are made without the involvement of the works council, they are invalid in
most cases. The degree of involvement goes from mere information-sharing (for instance personnel
planning, training, and changes of production sites) to real co-determination. This means that the
works council must agree with management decisions such as those involving layoffs or hiring. In
the battle for control Bernd Osterloh, head of the works council of Volkswagen, was one of the main
players. His counterpart at Porsche was Uwe Hück. Both were members of the same union, IG
Metall, although the union only has a consulting role for works councils.
The Supervisory Board
In the case of mergers and acquisitions or other strategic decisions another layer of co-
determination comes into effect, the supervisory board. U.S. firms follow a monistic (single-tier)
model, meaning that there is a single board of directors including outside and inside directors. The
latter are executives like the CEO and the CFO. In contrast, German firms have dualistic boards
(dual-tier), which include a management board and a supervisory board. The management board
consists of executives running the firm on a daily basis, such as the CEO, CFO, and Head of Human
Resources. The supervisory board, which meets at least four times (and frequently 10 times) a year,
monitors, controls and appoints the management board. The supervisory board also decides on
important strategic decisions, such as mergers and acquisitions. Law demands that in public
companies with more than 2000 employees – such as Volkswagen and Porsche – half of the
members of the supervisory board represent the owners, and the other half the employees. In case
of a stalemate the chairman has two votes. Law requires that the chairman is a representative of the
owners, but if the chairman cannot attend a meeting his substitute comes from the employees' side.
The size of a supervisory board can differ. Volkswagen’s supervisory board consisted of 20
members, the holding Porsche SE had 12 members on its supervisory board. For boards of this size
the employees can elect to have two to three people who are not employed by the firm among their

representatives; these are typically union officials. Figures 5 and 6 show the composition of the
Volkswagen and Porsche Supervisory Boards in May 2009, a critical phase of this takeover battle.
The Role of Ferdinand Piëch
Ferdinand Piëch proved to be a virtuoso of the German system of corporate governance. When
Wendelin Wiedeking proposed that the Porsche-Piëch families take over Volkswagen in March of
2005, the heads of the families, Wolfgang Porsche and Ferdinand Piëch, were in favor of this plan.
Ferdinand Piëch appreciated the masterful way in which Wiedeking had reorganized Porsche in the
1990’s. When the public became aware of Porsche’s plan to purchase Volkswagen shares it was met
with approval by politicians and workers representatives, such as the union IG Metall and Bernd
Osterloh, chief of the Volkswagen Works Council. They assumed that Porsche’s equity position
would be about 20%. The general attitude was that it was beneficial to have Porsche as a second big
shareholder – in addition to the federal state of Lower Saxony – in order to prevent hostile
takeovers. Stakeholders praised the long record of good collaboration between the two firms.
By June 2006, Porsche owned 25.1% of Volkswagen's voting shares, in April 2007 its position had
grown to 30.9%. The market price of Volkswagen shares reacted favorably to news of Porsche’s
acquisitions. When Porsche Holding owned 30% of the shares and thus was legally required to
make an offer to the other shareholders, it was not attractive. The price offered was based on the
previous 3-months average, but the current value of the shares was much higher.
In 2007, when it became apparent that Porsche favored abolishing the Volkswagen Act, the climate
became more and more hostile. The leader of the union IG Metall in Lower Saxony declared, “We
won’t accept attacks on the house wage rules on co-determination at Volkswagen. Whoever raises a
question about them must reckon with a hefty reaction from workers. We are ready to fight.” 12 As
12
Milne (2007)
Porsche began to make plans to take control over the much larger firm, Volkswagen workers sued to
get greater representation on the Supervisory Board of Porsche Holding. It had been suggested that
Porsche and Volkswagen employees would each have three seats, even though Porsche had about
12,000 employees compared to Volkswagen’s 324,000 employees. Moreover, the two family
branches Porsche and Piëch began to fight against each other. Wolfgang Porsche favored the
takeover of Volkswagen by Porsche and also of Wiedeking’s plans to make Volkswagen more like
Toyota. On the other side, Ferdinand Piëch wanted to create an integrated, global conglomerate of
the two firms with Volkswagen, and therefore himself, in the controlling position. Piëch had the
support of Bernd Osterloh, head of the Works Council at Volkswagen as well as the Volkswagen
employees.
The course of events depended greatly on the personality of Ferdinand Piëch himself. He had
climbed the ranks to the leadership of Audi and then to the CEO of Volkswagen, earning a
reputation as a fighter, and has said of himself, “Either I’m shot dead, or I win.”13 A manager who
had worked with him commented that “Piëch always had unchecked power at Volkswagen. Now he
finds that if Wolfgang Porsche says no to something then it doesn’t happen. He isn’t very happy.”14
Piëch’s skillful maneuvering to limit Porsche’s power in Volkswagen was evident when Piëch did
not attend a meeting of Volkswagen’s Supervisory Board on September 12, 2008. This meant his
substitute came from the employees’ side and that the employees’ representatives had the majority.
The supervisory board decided that it needed to approve all business transactions between Porsche
and the Volkswagen subsidiary Audi,15 an action that severely limited the power of Porsche.
Wiedeking and Wolfgang Porsche were furious. It was clear that Piëch had changed sides and was
fighting the merger.
13
Hawranek (2009)
14
Milne (2008, Mar 3)
15
Retrieved from http://www.welt.de/wirtschaft/article3711670/Das-war-der-geheime-Uebernahme-Plan-von-
Porsche.html

The Final Straw: The Financial Crisis
In September 2008 there was acute turbulence in the financial markets. Lehman-Brothers collapsed
and credit markets froze. At that time Porsche owed about € 9 Billion to its banks, yet it needed to
go even deeper in debt in order to increase its ownership of Volkswagen from a little over 42% to
over 50%. But as banks become more and more nervous, their terms for giving credit to Porsche
grew stricter. In March 2009 Porsche managed to refinance a loan of €10 billion. However, under
the terms of the refinancing, Porsche had to pay interest payments of €600 million per year and
repay €3.3 billion of principle within six months. Slow car sales limited Porsche’s cash flow. To
make matters worse, Porsche held a 50.8% stake in Volkswagen, but that stake did not provide
decision making power because the New Volkswagen Act had not been repealed. Porsche had
hoped to get into a controling position that would enable it to use Volkswagen’s funds to service its
own debt. Now Volkswagen was back in the driver’s seat. The Porsche and Piëch families held a
meeting with the CEO's and CFO's of Volkswagen and Porsche on May 6th, 2009. It was obvious
that Porsche needed to reduce its debts – either by selling its automobile company or by a merger
with Volkswagen on Volkswagen’s terms. On May, 7th, 2009, Wiedeking informed the Porsche
employees that the takeover attempt had failed and that Porsche and Volkswagen planned to merge
instead – he called it a “marriage of convenience”. A few days later, Ferdinand Piëch, Volkswagen's
CEO Winterkorn, the head of Volkswagen's works council Osterloh, and a representative of the
government of Lower Saxony met quasi-privately on Sardinia. Based on interviews given there, it
became clear that the Volkswagen stakeholders had feared that the banks might stop supporting
Porsche and that could have led to a sale of Porsche's 51% stake in Volkswagen to foreign
investors. Piëch stressed how important it was “for the heritage of my grandfather” that he
intervened in the takeover battle.16
16
Retrieved from http://www.handelsblatt.com/unternehmen/industrie/piech-tranchiert-wiedeking-mit-feinen-
schnitten/3175194.html?p3175194=2
Even after the decision of a merger with Volkswagen, Porsche needed to improve its liquidity as it
was operating at the limit of its bank credit. It asked for a loan of €1.75 billion from the public bank
KfW, which provided help for firms which had gotten into a credit crunch due to the global
financial crisis. The loan was denied in June, since the bank determined that Porsche’s financial
distress was not caused by the crisis but by poor management decisions. Finally, after about two
months of negotiations, Porsche was able to improve its liquidity by another €1 billion, when the
Emir of Qatar stepped in. The Qatar Investment Authority acquired options on 17% of the voting
shares of Volkswagen from Porsche in August 2009. In addition, the emirate bought 10% of
Porsche' voting shares – this was the first time that the Piëch/Porsche families sold their voting
shares to non-family members. Moreover, the emirate gave a loan to Porsche of € 265 million. In
total, the emirate of Qatar invested €7 billion in Porsche.17 However the emirate was not interested
in Porsche per se; it wanted to be invested in Volkswagen. In the end, via Porsche the emirate
acquired 19% of Volkswagen voting shares and became the third largest shareholder of Volkswagen.
Winners and Losers
Wiedeking had proposed the audacious Porsche acquisition of Volkswagen because he recognized
the need for economies of scale in research & development, for instance to meet the environmental
demands required of car manufacturers. In the course of the takeover battle, he referred to it as an
intense chess match. But he ultimately lost that match. In July 2009, Porsche’s supervisory board
fired Mr. Wiedeking. He had successfully reorganized Porsche in the 1990’s and had been very
well rewarded by Porsche. His contract guaranteed him 0.9 percent of Porsche’s profit, and no one
had anticipated how great that profit would be. In 2008 he was the highest paid executive in
Germany, with a compensation of over €77 million. His severance package was €50 million, half of
17
Retrieved from http://www.focus.de/finanzen/finanz-news/porsche-volkswagen-katar-wird-neuer-
grossaktionaer_aid_426320.html
which he donated to a charitable trust that would promote “socially fair development” at the
facilities of Porsche.18
In July 2009 Volkswagen proposed officially to acquire 49.9% of Porsche AG – the car
manufacturer itself - in a first step toward acquisition; the rest would be acquired later. The Porsche
holding would receive about €8 Billion in order to pay off most of its enormous debts. Volkswagen
also considered taking over the Austrian dealership of the Porsche/Piëch families, which would
mean €3 Billion extra for the families. The Porsche/Piëch families would own more than 50% of
the newly integrated Volkswagen conglomerate, while Porsche would become Volkswagen’s tenth
brand. It had been a long and tumultuous family feud, but in the end it had also been profitable.
Now the Porsche/Piëch families own more than half of one of the world’s largest automobile
groups. And Ferdinand Piëch is still in control, even though his cousin Wolfgang sometimes wryly
refers to him as a “non-namebearer”.
18
Dougherty (2009)
Figure 1
Timeline of Events
October 2004 EU Commission challenges the Volkswagen Act

March 2005 EU Commission submits a petition to the EU Court of Justice, asking it to rule
that the Volkswagen Act contradicts EU principles
March 2005 Wiedeking (CEO of Porsche) and Härter (CFO of Porsche) propose to the
Porsche-Piëch families that they takeover Volkswagen
September 2005 The public learns that Porsche is acquiring Volkswagen equity
June 2006 Porsche owns 25.1% of Volkswagen's voting shares
February 2007 It is getting clear that the EU Court of Justice will dismiss the Volkswagen Act
April 2007 Porsche owns 30.9% of Volkswagen's voting shares
October 2007 EU Court of Justice rules that the Volkswagen Act contradicts EU principles
November 2007 Wiedeking states that Porsche has the funds available necessary to acquire the
majority of Volkswagen voting shares
May 2008 The German Goverment drafts a bill very similar to the dismissed Volkswagen
Act
June 5, 2008 European Commission charges Germany with failing to comply with the
October ruling and gives Germany a 2 month deadline to respond
September 12, Ferdinand Piëch (head of the supervisory board of Volkswagen) does not show
2008 up at a supervisory board meeting
September 15, Lehman Brothers applies for Chapter 11 which leads to turbulences at financial
2008 markets
October 24, Volkswagen shares are skyrocketing
2008
November 2008 Porsche publishes its annual report 2007/08 with higher profits from options
and derivatives than car sales
November 2008 In spite of protests of the EU Court of Justice the German parliament passes a
new Volkswagen Act, which is basically the same as the original act.
December 8, The New Volkswagen Act becomes law
2008
First quarter 2009 It is getting more and more difficult for Porsche to refinance its loans
Spring 2009 Porsche's banks start to put pressure on Porsche's owners of voting shares, the
families Porsche- Piëch, to reduce Porsche's debts
May 6 2009 In meeting of the Porsche- Piëch families and management of Volkswagen and
Porsche it is made clear that either Porsche needs to be sold or a merger with
Volkswagen on Volkswagen's terms is necessary
July 2009 Volkswagen proposes officially to acquire 49.9% of Porsche AG, the rest will
be acquired later
August 2009 The holding of the Emirate Quatar acquires 10% of Porsche's voting shares and

purchases options on 17% of Volkswagen's voting shares from Porsche

Figure 2
Volkswagen Advertisement in 1939

Figure 3
The Porsche 356
The Company’s First Production Automobile

Figure 4
Volkswagen: For a Brief Period the Most Valuable Company in the World

Figure 5
Supervisory Board of Volkswagen in May 2009
Owners' Representatives Employees' Representatives

Ferdinand Piëch (Chairman, former CEO of Jürgen Peters (Deputy Chairman, Former Head
Volkswagen) of IG Metall)
Philipp Rösler (Minister of Economic Affairs of Babette Fröhlich (IG Metall, Head of Strategic
the Federal State of Lower Saxony) Planning)
Michael Frenzel (CEO of TUI AG) Peter Jacobs (Chairman of the Works Council at
the Volkswagen AG Emden Plant)
Michael Gaul (former Member of the Hartmut Meine (Director of the Regional Office
Management Board of EON AG) of IG Metall)
Jürgen Grossmann (CEO of RWE AG) Peter Mosch (Chairman of the General Works
Council of Audi AG)
Holger Härter (CFO, Porsche AG; member on Bernd Osterloh (Chairman of the General and
the Volkswagen supervisory board 05/03/2006 - Groups Works Council of Volkswagen AG)
07/23/2009)
Roland Oetker (Managing Partner of ROI Jürgen Stumpf (Chairman of the Works Council
Verwaltungsgesellschaft mbH) at the Volkswagen AG Kassel Plant)
Wolfgang Porsche (Chairman of the Supervisory Bernd Wehlauer (Deputy Chairman of the
Board of Porsche Automobil Holding SE; General and Groups Works Council of
Chairman of the Supervisory Board of Dr. Ing. Volkswagen AG)
h.c. F. Porsche AG)
Christian Wulff (Minister-President of the Wolfgang Ritmeier (Chairman of the Board of
Federal State of Lower Saxony) Management of Volkswagen Management)
Wendelin Wiedeking (CEO of Dr. Ing h.c. F. Heinrich Söfjer (Member of the Works Council
Porsche AG; member on the Volkswagen Volkswagen Commercial Vehicles)
supervisory board 01/28/2006 - 07/23/2009)
Retrieved from
http://annualreport2009.volkswagenag.com/corporategovernance/executivebodies/supervisoryboard
.html

Figure 6
Supervisory Board of Porsche SE in May 2009
Owners' Representatives Employees' Representatives

Wolfgang Porsche (Chairman) Uwe Hück (Deputy Chairman, Chairman of the
General Works Council of Dr. Ing. h.c. F.
Porsche AG)
Ulrich Lehner (Member of Former Chairman of Hans Baur (Union Official)
Henkel AG & Co. KG aA
Ferdinand Piëch (Chairman of the Supervisory Berthold Huber (Head of IG Metall)
board of Volkswagen, Former CEO of
Volkswagen)
Hans Michel Piëch (Lawyer in Private Practice) Peter Mosch (Chairman of the General Works
Council of Audi AG, Works Council of Porsche
Automobil Holding SE)
Ferdinand Oliver Porsche (Member of the Board Bernd Osterloh (Chairman of the General and
of Management of Familie Porsche AG Groups Works Council of Volkswagen AG,
Beteiligungsgesellschaft) Works Council of Porsche Automobil Holding
SE)
Hans-Peter Porsche (Engineer) Werner Weresch (Member of the Works Council
of Dr. Ing. h.c. F. Porsche AG)
(Retrieved from http://www.porsche-se.com/filestore.aspx/default.pdf?

pool=pho&type=download&id=anualreport0809-complete&lang=de&filetype=default page 7)

Bibliography
Benoit, Milne, & Tait (2008, June 5). Brussels legal threat to VW Law. Financial Times (London
Edition). p. 21
Dougharty, C. (2009, 25 July). Porsche chief became biggest casualty of battle he started with VW.
International Herald Tribune (Paris Edition). p.13.
Hawranek, Dietmar (2009, July 21). The Porsche Story: A Fierce Family Fued. Spiegel. Retrieved
from http://www.spiegel.de/internation/business/0,1518,637243,00.html
Landler, M. (2007, Ocdtober 23). Court Stikes Down ‘Volkswagen Law.’ New York Times.
Retrieved from http://www.nytimes.com
Milne, R. (2007, September 7). Union warns Porsche on changing rules at VW. Financial Times,
p.1.
Milne, R. (2008, March 3). Poison grows on Porsche’s plans for VW. Financial Times (Asian
Edition), p.20.
Milne, R (2008, October 29). Regulator Probes VW Share Trades, Financial Times, Retrieved from
http://www.FT.com.
Mommsen, Hans & Grieger, Manfred 1996. Das Volkswagenwerk und seine Arbeiter im Dritten
Reich. Düsseldorf: Econ Verlag, ISBN 3-430-16785-x
Schafer (2008, November 7). Porsche makes EUR 6.8 bn from VW trades. Financial Times.
Retrieved from http://www.FT.com
Wild Ride Takes Volkswagen Shares to New Peak and Back Down. (2008, October 29). New York
Times. Retrieved from http://www.nytimes.com
Zuckerman and Esterl (2008, October 29). VW’s 348% Two Day Gain is Pain for Hedge Funds.
Wall Street Journal (Eastern Edition). P. C1.


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Nolte, Heike

Other Persons: Wright Butcher, Alva

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Dr. Heike Nolte

Dr. Alva Wright Butcher

Supported by a 2011 NIBEN Curriculum Development Grant

Volkswagen and Porsche:

Electronic copy available at: http://ssrn.com/abstract=1996386

events in this takeover battle.

Volkswagen – the Peoples Car

Volkswagen and Porsche:

Electronic copy available at: http://ssrn.com/abstract=1996386

produced until 1955,

• Porsche would be the authorized dealer for Volkswagen cars in Austria.

Electronic copy available at: http://ssrn.com/abstract=1996386

Volkswagen. Figure 3 shows a 1951 split windshield 356 Cabriolet.

Porsche/ Piëch Families

Supervisory Board of Porsche.

Porsche’s Financial Strategy

wanted to have access to Volkswagen’s technological expertise, manufacturing capabilities, and

Volkswagen and Porsche:

regulations. The families eventually agreed.

return on the investment of buying the option at an earlier time.

Cash Settled Options

equivalent of its value.

Volkswagen and Porsche:

cash settled options.

The Classic Short Squeeze

Volkswagen voting shares remained in circulation.

Volkswagen and Porsche:

the price of Volkswagen’s shares skyrocketed.

Hedge Funds Cry “Foul”

Porsche Hedge Fund or Auto Manufacturer?

funds and banks pay for the whole takeover.”7

Porsche’s Control Strategy

The Volkswagen Act and Voting Rights

Porsche were counting on the repeal of the Volkswagen Act.

clear to take over Volkwagen!

EU Commission passed without any consequences.

and supervisory boards in a stakeholder economy.

Shareholder versus Stakeholder Economies

Frits Bolkestein, a high EU representative, once described a stakeholder economy as a“regulated

heavily on banks for financing.

contracts is relatively rare.

Germany’s stakeholder economy differs tremendously from shareholder economies. The

contracts, transparency is not that important.

Corporate Governance in a Stakeholder Economy

Volkswagen and Porsche:

Volkswagen and Porsche:

The Supervisory Board

Volkswagen and Porsche:

The Role of Ferdinand Piëch

fighting the merger.

Volkswagen and Porsche:

intervened in the takeover battle.16

Winners and Losers

refers to him as a “non-namebearer”.

October 2004 EU Commission challenges the Volkswagen Act

Volkswagen and Porsche:

Volkswagen and Porsche: