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12/02/2009

Volkswagen CEO Martin Winterkorn and Michael Macht, the new Porsche boss, intended to demonstrate how well they get along. After all, the battle for control of the two companies is over, with Porsche having failed in its attempt to take over giant automaker VW. Instead, VW is now absorbing the Porsche brand. And Winterkorn wanted to show that VW isn't bearing any grudges.

"Two of the most efficient companies in the automobile industry are coming together here," Winterkorn said on Wednesday of last week when he and Macht presented Porsche's annual financial statement. Posing for photos, Winterkorn even congenially placed his arm around Macht.

But the VW CEO was about to discover that certain people at Porsche haven't buried the hatchet quite yet.

Standing on the stage, Macht announced that Porsche had come in second place in a well-known US quality study. The other rankings were listed on a slide projected onto the wall behind him. Volkswagen was much farther down the list, in 16th place, while Audi was near the bottom, in 20th place. The three German carmakers were highlighted in red.

A Porsche employee had apparently smuggled the chart into Macht's presentation. It was the kind of diagram that could have come from the era of longtime Porsche CEO Wendelin Wiedeking. After Porsche bought a substantial stake in VW in 2005, Wiedeking began calling attention to the VW Group's weaknesses.

Winterkorn was sitting on the stage next to the new Porsche CEO. He saw the list, twisted to the side and, from then on, turned his shoulder to Macht.

Open Wounds

It will not be easy for VW and Porsche to come up with a sensible cooperation model. During the takeover battle, executives and works councils spent more than three years battling each other, and for many, the wounds have not healed yet. In the central German city of Wolfsburg, where VW is headquartered, some are out for revenge. And at Porsche headquarters in Stuttgart, there are those who are still unwilling to believe that they are the losers in this conflict.

For better or for worse, however, the two companies have no choice but to work together.

The Porsche holding company, which owns 51 percent of common stock in the VW Group, is still deeply in debt, and it continues to face the threat of bankruptcy.

Accountants put this in more refined terms, but their words are nevertheless clear: "Should the steps to merge Porsche Automobil Holding SE and Volkswagen AG, which include debt relief, not proceed as planned," the accounting firm Ernst & Young writes in its commentary on the Porsche financial statement, "a critical liquidity situation could emerge at Porsche Automobil Holding SE by the end of 2009, which would jeopardize the continued existence of the company and the group."

VW cannot simply look on as Porsche heads toward possible bankruptcy. If that happened, a bankruptcy administrator would take control at Porsche headquarters. His or her goal would be to sell off the assets, including Porsche's 51-percent stake in VW, to the highest bidder. They could end up in the hands of a Chinese sovereign wealth fund -- a prospect that VW executives and the German state of Lower Saxony, where Wolfsburg is located, want to prevent at all costs.

For this reason, VW's chief financial officer, Hans Dieter Pötsch, and an army of consultants are developing a plan that would enable VW to rescue Porsche and then itself. The contracts and their appendices cover more than 1,200 pages, and notaries must read them out loud, word for word. Some have hired acting students to perform the job for them.

Seeking Approval

They will have to be finished by Thursday, because that's when the VW Group, at a special shareholders' meeting, expects to seek shareholder approval of its key resolutions.

The auto company will invest a total of more than €16 billion ($24 billion) in the Porsche deal. At the end of a series of complex transactions, Porsche will be the 10th brand in the VW Group, next to Audi, Bentley and others. VW also plans to acquire the Porsche Holding auto dealership in Salzburg, Austria from the Porsche and Piëch families. This would make the new VW Group the second-most powerful carmaker in the world, next to Toyota.

The most important shareholders are expected to be the state of Lower Saxony (20 percent, plus one share of common stock), the emirate of Qatar (20 percent, minus one share of common stock) and the Porsche and Piëch families (30 percent). Under this plan, the families will hold significantly fewer VW shares than the 40 percent originally planned.

Nevertheless, they can be satisfied with the outcome of the takeover battle. So can Lower Saxony Governor Christian Wulff, a member of Angela Merkel's conservative Christian Democratic Union (CDU). Wulff is the real winner of the corporate struggle. In the negotiations, he pulled off the feat of securing important special rights for Lower Saxony, rights that give the state's representatives a critical say in what happens in the VW Group in the future. This position of power is now safeguarded even more effectively than it was before.

Former Porsche CEO Wiedeking, in an effort to deprive the state of its power over VW, fought Germany's so-called "VW law," which guarantees the state of Lower Saxony a veto and two seats on the group's supervisory board. But now VW shareholders are expected to rule that these two provisions will continue to apply. When that happens, they will be permanently included in the company's articles of incorporation and will remain valid even if the European Union succeeds in overturning the VW law. The European Commission opposes the law because it violates EU rules on the free movement of capital.

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• Part 1: Takeover Battle Leaves Open Wounds at Volkswagen and Porsche
• Part 2: Nagging Doubts about Merger