After a dramatic three-and-a-half-year battle to take control of much larger Volkswagen, German sports carmaker Porsche has given up the chase and agreed in principle to a merger with its one-time prey.
Porsche announced the U-turn late on Wednesday after a series of intense meetings between Wolfgang Porsche and Ferdinand Piech, the patriarchs of the families that control the two iconic German companies. Now, VW and Porsche will enter weeks of intense talks to thrash out the final structure of a merger that will add Porsche as a tenth brand to VW's stable, which already includes Audi, Bentley and Czech manufacturer Skoda, as well as the VW brand. (See the 50 worst cars of all time.)
Though details are still unclear, the plan appears to place the individual brands under the umbrella of a kind of holding company, described in a statement by Porsche as an "integrated leading company." The merger also entails a $6.7 billion capital increase, financed by Porsche's existing shareholders, for the new company this year or next, according to a Reuters report.
On news of the rights issue, Porsche's shares tumbled 15.2% to $64.28 in early Frankfurt trading on Thursday. The company issued a statement saying the controlling families had discussed "capital measures," but did not elaborate.
Analysts say the deal seems to fall short of a full merger. It appears that Porsche's car-making unit will not be sold to VW, but will retain some independence. And the rights issue will be dilutive to earnings because profit will be distributed among a larger number of shares. The uncertainty about the structure of the deal was fueled by comments from Bernd Osterloh, head of VW's works council, who said the two companies may not merge at all. (See pictures of car art)
"It appears that the terms merger and integration are being used interchangeably here. And, because of VW's bylaws alone, we are more than skeptical that the way for a merger can be made clear at all," he said at a conference in Wolfsburg on Thursday.
This deal seems to be yet another sign of how hard the global automotive industry has been hit by the recession. The news of the Porsche-VW merger follows the announcement earlier this week by Italian carmaker Fiat that it wants to acquire U.S. automaker Chrysler, which the U.S. government forced into bankruptcy protection last week, and GM Europe. Fiat wants to merge with Chrysler and GM's Opel to create one of the largest car companies in the world. (See Chrysler's top ten moments.)
The epic battle between Porsche and VW is emblematic of the easy money days automakers were enjoying before the financial crisis hit. With annual sales of more than $151 billion, Volkswagen is Europe's biggest carmaker, 16 times the size of Porsche, which generates annual sales of about $9.3 billion. But through a series of highly leveraged financial deals that began in 2005, Porsche acquired a voting stake of 50.8% in VW. In January, Porsche said it planned to raise its stake to 75% this year.
Strategically, the move made sense for Porsche. VW is Porsche's most important parts supplier. The European Union was keen to strip voting restrictions on VW shares that protected it from a hostile takeover. And Porsche saw itself as a white knight, coming in to shield VW from any potential raider. (See pictures of American muscle cars in the movies)
But if Porsche's management found it easy to wind its way through capital markets to scoop up VW shares, it was less agile at negotiating the twists and turns in the political relationships needed to take control of a company like VW. The company is based in Wolfsburg in Lower Saxony and the state holds 20% of its shares, but through a law written just for VW, the so-called "Lex VW," the state cannot be outvoted. Lower Saxony's governor, Christian Wulff, a Christian Democrat who sits on the VW supervisory board, opposed a takeover of the company by Porsche. So it was no surprise that Wulff welcomed the merger announcement.
But Porsche's biggest obstacle was Piech, whose grandfather designed the iconic VW Beetle and also created the foundations of the Porsche brand. Piech has long had ambitions of bringing Porsche under VW's roof and has been working for years to build VW into the world's leading car company. VW sold 6.27 million cars last year, and Piech, VW execs have said, has his sights set on overtaking Toyota, which sold 8.9 million cars, and GM, which sold 8.35 million. (See pictures of a brief history of Pontiac.)
Unable to force Piech to give in, Porsche seems to have just run out of time. Its gambit to acquire VW cost Porsche dearly as it piled up a $12 billion mountain of debt to finance stock purchases. With the sports carmaker beginning to struggle under the weight of that debt, Porsche and Piech met in Salzburg, Austria on Wednesday to end the feud. Following that meeting, Porsche issued a statement declaring that the two companies aimed to "develop a corresponding basis for decision-making on the future structure of the common group."
But a VW executive, speaking anonymously to Germany's Der Spiegel magazine, put it more simply: "The tail is no longer wagging the dog."