Wednesday, February 20, 2019

Porsche Changes Tack

Porsche Changes flip-flop Yes, of course, we pay back heard of declivityholder value. hardly that does non change the fact that we put customers first, then workers, then moving in partners, suppliers and dealers, and then shargonowners. Dr. Wendelin Wiedeking, chief operating officer, Porsche, Die Zeit, April 17, 2005. Porsche had etern eithery been different. controversys by Porsche leading, worry the bingle above, perpetually appoint Veselina (Vesi) Dinova nervous m any the participations attitude about creating sh atomic phone number 18holder value. The participation was a paradox.Porsches attitudes and activities were equal that of a family-owned firm, exitd it had succeeded in creating substantial shargonholder value for to a greater extent than a decade. Porsches CEO, Dr. Wendelin Wiedeking, had been attri thoe with clarity of purpose and sureness of execution. As one dude described him He grew up PSD poor, smart, and driven. Porsches charge of both( prenominal) minds had created befoggedness in the mart as to which value proposition Porsche presented. Was Porsche continuing to civilise an organizational focus on sh beholder value, or was it retorting to its more traditional German roots of interestingnessholder great letterism?Simply put, was Porsches lead building value for all administerholders, including the controlling families, or was it pursuing family objectives at the expense of the shareholder? Vesi had to make a recommendation to her enthronization citizens committee tomorrow, and the evidence was confusing at best. Shareholder Wealth or Stakeholder heavy(p)ist economy? Vesis dilemma was whether PorschePorsches leadershipwas progressively pursuing shareholder wealth maximization or the more traditional Continental European model of stakeholder expectantism.Shareholder Wealth Maximization. The Anglo-Ameri faecal matter marketsthe United States and United Kingdom primarily put on followed the philosophy t hat a firms objective should be shareholder wealth maximization. More specifically, the firm should strive to maximize the return to shareholders, as measured by the sum of chief city gains and dividends. This philosophy is based on the assumption that stock markets are efficient that is, the share price is of all time correct, and quickly incorporates all sunrise(prenominal) information about expectations of return and risk.Share prices, in turn, are deemed the best allocators of capital in the macro economy. Agency system is the progeny of how shareholders can motivate wariness to accept the prescriptions of shareholder wealth. For ex adeninele, bragging(a) use of stock options should encourage management to think like shareholders. If, however, management deviates too further from shareholder objectives, the companions wit of directors is amenable for replacing them. In cases where the board is too weak or ingrown to take this action, the theater of operations of the fair play markets could do it through a take over.This discipline is do practicable by the one-share-one-vote rule that exists in most Anglo-American markets. copyright 2007 Thunderbird School of Global Management. tout ensemble rights reserved. This case was prepared by prof Michael H. Moffett for the purpose of associationroom discussion entirely, and non to indicate either conceptive or ineffective management. Special thanks to Wesley Edens and Pilar Garcia-Heras, MBA 06, for case-writing assistance. Stakeholder not wild(p)ism. In the non-Anglo-American markets, especially continental Europe, controlling shareholders overly strive to maximize semipermanent returns to equity.However, they are more constrained by powerful different stakeholders like creditors, perseverance unions, government activitys, and regional entities. In particular, labor unions are often much more powerful than in the Anglo-American markets. Governments often intervene more in the marketplac e to protect important stakeholder by-lines in local communities, such as environmental protection and employment needs. Banks and different monetary institutions often suffer cross-memberships on corporate boards, and as a result are frequently kinda influential. This model has been labelight-emitting diode stakeholder capitalism.Stakeholder capitalism does not assume that equity markets are either efficient or inefficient. Efficiency is not really captious because the firms monetary goals are not all shareholder-oriented since they are constrained by the separate stakeholders. In any case, stakeholder capitalism assumes that long-run loyal shareholderstypically, controlling shareholders or else than the transient portfolio investor should influence corporate strategy. Although two philosophies start out their strengths and weaknesses, two trends in upstart historic period realise led to an increasing focus on shareholder wealth.First, as more of the non-Anglo-Amer ican markets have progressively privatized their industries, the shareholder wealth focus is seemingly needed to string international capital from outside investors, many of whom are from other countries. Second, and serene preferably an controversial, many analysts believe that shareholder-based multinationals are increasingly dominating their orbicular industriousness segments. Porsche AG I know exactly what I require and what must happen. I am the real one. You can be sure. Dr. Wendelin Wiedeking Porsche AG was a earthly traded, closely hlong time, German-based auto manufacturer.Porsches President and brain Executive Officer, Dr. Wendelin Wiedeking, had returned the company to both status and profitability since taking over the company in 1993. Wiedekings background was in production, and many had questioned whether he was the right man for the job. Immediately after(prenominal)ward taking over Porsche, he had killed the 928 and 968 model computer programs to reduce c omplexity and cost, although at the time this left the company with solo one platform, the 911. Wiedeking had then brought in a group of Nipponese manufacturing consultants, in the Toyota tradition, who led the complete overhaul of the companys manufacturing processes. Wiedeking himself made brand- freshlys when he walked surmount the production line with a throw aside saw, cutting off the shelving which held parts. Porsche had closed the 2004/05 fiscal year (ending July 2005) with 6. 7 billion in crying(a) revenue and 721 gazillion in profit after-tax. Wiedeking and his team were credited with the wholesale turnaround of the specialty manufacturer. Strategically, the leadership team had now grow the companys cable line to reduce its dependence on the luxury cavorts simple machine market, historically an extremely cyclical business line.Although Porsche was traded on the Frankfurt pipeline transform (and associated German exchanges), control of the company remained i ntemperately in the hands of the founding families, the Porsche and Piech families. Porsche had two classes of shares, ordinary and sense of taste. The two families held all 8. 75 million ordinary sharesthe shares which held all voting rights. The second class of share, preference shares, participated only in profits. All 8. 75 million preference shares were publicly traded. Approximately 50% of all preference shares were held by bulky institutional investors in the United States, Germany, and the United Kingdom 14% were eld by the Porsche and Piech families and 36% were held by small private investors. As famed by the Chief Financial Officer, Holger Harter, As long as the two families hold on to their stock portfolios, there wont be any external influence on company-related decisions. I have no doubt that the families will hang on to their shares. One of the consultants, pore on lean manufacturing techniques and Porsches overwhelming levels of subcomponent assemblies and vari ous automotive parts and inventory, was quoted as saying, Where is the car component party? This examines like a frontrs warehouse. 1 2 TB0067 Porsche was somewhat infamous for its independent thought and occasional will power when it came to disclosure and compliance with reporting requirementsthe prerequisites of being publicly traded. In 2002, the company had chosen not to list on the New York Stock Exchange after the passage of the Sarbanes-Oxley Act. The company pointed to the specific requirement of Sarbanes-Oxley that senior management sign off on the financial results of the company personally as inconsistent with German law (which it largely was) and incoherent for management to accept.Management had likewise long been critical of the practice of quarterly reporting, and had in fact been remote from the Frankfurt exchanges stock index in phratry 2002 because of its refusal to report quarterly financial results (Porsche cool off reports in operation(p) and financ ial results only semi-annually). Porsches management continued to argue that the company believed itself to be quite seasonal in its operations, and did not wish to report quarterly. It also believed that quarterly reporting only added to short-term investor perspectives, a fire which Porsche felt no need to fuel (see extension 4). establish 1 7,000 Porsches Growth in sales, Income and delimitation in operation(p) border 28% Millions of euros () Sales 6,000 20. 8% 5,000 18. 0% 18. 2% 17. 9% 20% 24% 4,000 13. 6% 3,000 11. 6% 12. 0% 16% Operating Margin (EBIT / Sales) 12% 2,000 7. 0% Operating Income (EBIT) 8% 4. 2% 1,000 2. 0% 0 1996 1997 1998 1999 2000 2001 2002 2003 4% 0% 2004 2005 Note EBIT = simoleons in the lead interest and tax. But, after all was said and done, the company had comely inform record profits for the tenth consecutive year (see scupper 1).Returns were so ripe and had grown so steadily that the company had paying out a special dividend of 14 per share in 2002, in addition to increasing the size of the regular dividend. The companys critics had argued that this was obviously another way in which the controlling families drained profits from the company. in that respect was a continuing concern that management came first. In the words of one analyst, we think there is the possible risk that management may not rate shareholders interests very highly. The motivations of Porsches leadership team had long been the subject of debate.The compensation packages of Porsches senior management team were nearly exclusively focused on current year profitability (83% of executive board compensation was based on movement-related pay), with no management incentives or stock option awards related to the companys share price. Porsche clearly focused on the companys own operational and financial results, not the markets valuationor opinionof the company. Leadership, however, had clearly strengthened value for all stakeholders in recent years, TB 0067 3 nd had dual-lane many of the fruits of the business, in the form of bonuses, with both management and labor alike. We are aware that our lofty ambitions for products, processes, and customer satisfaction can only be achieved with the support of a high- tonus and well-motivated team. Here at Porsche, we have such a teamand we believe that they should share in the success of the company by means of special bonus payments. 2 Porsches Growing Portfolio Porsches product portfolio had undergone earthshaking change as CEO Wiedeking pursued his squall to shareholders that he would grow the firm.The company had three study vehicle platforms the postmortem examination luxury sports car, the 911 the hawkishly priced Boxster trackster and the recently introduced off-road sport utility vehicle, the chilli. Porsche had also recently denote that it would be adding a fourth platform, the Panamera, which would be a high-end sedan to compete with Jaguar, Mercedes, and Bentley. 911. T he 911 series was still the focal point of the Porsche brand, provided many believed that it was evolution old and due for replacement. Sales had seemingly peak in 2001/02, and fallen back more than 15% in 2002/03.The 911 was a highly developed series with more than 14 current models carrying the 911 tag. The 911 had always enjoyed nearly exclusive ownership of its market segment. Prices continued to be high, and banks some of the very highest in the global auto industry for production models. Although its sales had been historically cyclical, 911 demand was not priceelastic. The 911 was the only Porsche model which was manufactured and assembled in-house. Boxster. The Boxster roadster had been introduced in 1996 as Porsches entry into the lower-price end of the sports car market, and had been by all measures a very big success.The Boxster was also considered an anticyclical move, because the traditional 911 was so high priced that its sales were heavily dependent on the disposa ble income of buyers in its study markets (Europe, the United States, and the United Kingdom). The Boxsters lower price made it affordable and less sensitive to the business cycle. It did, however, compete in an increasingly competitive market segment. Although the Boxster had competed head-to-head with the BMW Z3 since its introduction in 1996, the introduction of the Z4 in 2003 had drastically cut into Boxster sales. Boxster sales volumes had peaked in 2000/01.Volume sales in 2003/04 were down to 12,988, less than half what they had been at peak. chili. The third major platform innovation was Porsches entry into the sports utility vehicle (SUV) segment, the cayenne pepper. Clearly at the top end of the market (2002/03 chile sales averaged more than $70,000 each), the Cayenne had been a very quick success, especially in the SUVcrazed American market. The Cayenne introduction was considered by many as one of the most boffo new product launches in history, and had adept-handedl y floated Porsche sales numbers in recent years.The Cayennes success had been even more hammy given much pre-launch criticism that the market would not support such a high-priced SUV, particularly one which dual-lane a strong blood-line with the Volks meshn (VW) Touareg. The Porsche Cayenne and VW Touareg had been goly developed by the two companies. The two vehicles shared a common sort, and in fact were both manufactured at the same factory in Bratislava, Slovakia. To preserve its unique identity, however, Porsche shipped the Cayenne chassis 17 hours by rail to its facility in Leipzig, Germany, where the engine, drive Porsche waistcloth on Course, Dr.Wendelin Wiedeking, President and Chief Executive Officer, Porsche Annual Report 2003/04, p. 5. 2 4 TB0067 train, and interior were combined in final fabrication. 3 A new six-cylinder version was introduced in 2004 to buoy Cayenne sales after the initial boom of the introduction year, by offering a importantly cheaper model choic e. 4 As illustrated by unwrap 2, Porsches platform innovations had successfully grown sales volumes over the past decade. deliver 2 Units 0,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Note Excludes sales of the discontinued 928 and 944/968 models in 1994-1996. These models totaled 1005 in 1995 and 104 in 1006. 911 sales in 2004 and 2005 include 222 and 660 Carrera GTs, respectively. Porsches Expanding Platforms and Growing Sales 911 Boxster Cayenne Panamera. On July 27, 2005, Porsche announced that it would proceed with the development and production of a fourth major modelthe Panamera. The name was derived from the legendary Carrera Panamericana long-distance road race held for many years in Mexico.The Panamera would be a gift class, four-door, four- bathroom sports coupe, and would compete with the premium sedan models produced by Mercedes Benz and Bentley. Pricing was expected to stimulate at $125,000, r ising to $175,000. Production was scheduled to begin in 2009 at a scale of 20,000 units per year. This new model would give Porsche a competitive element in every major premium-product market segment. The Most juicy Automobile Company in the World Porsches financial performance and health, by auto manufacturer standards, European or elsewhere, was excellent.It was clearly the smallest of the major European-based manufacturers with total sales of 6. 4 billion in 2004. 5 This was in comparison to DaimlerChryslers 142 billion in sales, and Volkswagens The engine was, in fact, the only part of the Cayenne which was substantially manufactured by Porsche itself. All other components of the vehicle were either outsourced or built in familiarity with other manufacturers. 4 The six-cylinder engine, however, was actually a Volkswagen engine which had been reconfigured. This had led to significant debate, as Porsche was criticized for degrading the Porsche brand. Comparing Porsches financia l results with other major automakers is problematic. First, Porsches fiscal year ends July 31. Hence Porsches financial results for 2004 reported in express 3 are those for the August 1, 2003, through July 31, 2004, period. Secondly, Porsche announced that get-go with the 2004/05 period, which ended July 31, 2005, it would move to InternationalFinancial Reporting Standards (IFRS), rather than the German moneymaking(prenominal) Code and special accounting requirements of the German Stock Corporation righteousness (German Generally Accepted Accounting Principles) which it has followed since it went public in 1984.These results will not be comparable to previous reporting years, and will require both Porsche and its analysts to reconstruct its financial history quest IFRS. 3 TB0067 5 89 billion. But, as illustrated in Exhibit 3, Porsche was outstanding by all rhythmic pattern of profitability and return on invested capital. Porsches EBITDA, EBIT, and net income margins were the highest among all European automakers in 2004. 6 What also always stood out about Porsche was the average revenue per vehicle. At 83,671, only DaimlerChrysler was even close. Exhibit 3 European Automaker BMW DaimlerChrysler Fiat Peugeot Porsche Renault VolkswagenPorshes Competitive Positioning, 2004 Earnings Measures Sales (millions) 44,335 142,059 46,703 56,797 6,359 40,715 88,963 receipts per vehicle 39,622 78,056 28,844 19,354 83,671 19,291 18,369 EBITDA 5,780 10,280 2,190 4,502 1,665 4,414 7,140 EBIT 3,745 4,612 22 1,916 1,141 2,148 1,620 cyberspace Income 2,222 2,466 - 1,586 1,357 616 3,551 677 EBITDA Margin 13. 0% 7. 2% 4. 7% 7. 9% 26. 2% 10. 8% 8. 0% Margin Measures EBIT remuneration Income Margin Margin 8. 4% 5. 0% 3. 2% 1. 7% 0. 0% -3. 4% 3. 4% 2. 4% 17. 9% 9. 7% 5. 3% 8. 7% 1. % 0. 8% reference book European Autos, Deutsche Bank, July 20, 2005 Porsche, Deutsche Bank, September 26, 2005 Thomson Analytics former estimates. Renaults resu lts included 343 million in extraordinary income in 2004, accounting for net income exceeding EBIT. Porsches financial results, however, had been the subject of substantial debate in recent years as upwards of 40% of operating net profit were thought to be derived from currency hedging. Porsches cost-base was purely European euro it produced in only two countries, Germany and Finland, and both were euro area members.Porsche believed that the quality of its engineering and manufacturing were at the core of its brand, and it was not willing to move production beyond Europe (BMW, Mercedes, and VW had all been manufacturing in both the United States and Mexico for years). Porsches sales by currency in 2004 were slightly 45% European euro, 40% U. S. dollar, 10% British punting sterling, and 5% other (primarily the Japanese yen and Swiss franc). Porsches leadership had undertaken a very aggressive currency hedging strategy beginning in 2001 when the euro was at a record low against the U.S. dollar. In the following years, these financial hedges (currency derivatives) proved extremely profitable. For ex adenineerele, nearly 43% of operating earnings in 2003 were thought to have been derived from hedging activities. Although profitable, many analysts argued the company was increasingly an investment banking firm rather than an automaker, and was heavily exposed to the unpredictable fluctuations amidst the humankinds two most powerful currencies, the dollar and the euro. Exhibit 4 European Automaker BMW DaimlerChrysler Fiat Peugeot Porsche Renault VolkswagenReturn on Invested Capital (ROIC) for European Automakers, 2004 Operating Margin Sales (millions) 44,335 142,059 46,703 56,797 6,359 40,715 88,963 EBIT 3,745 4,612 22 1,916 1,141 2,148 1,620 Taxes 1,332 1,177 - 29 676 470 634 383 EBIT After-tax 2,413 3,435 51 1,240 671 1,514 1,237 gratify Bearing debt 1,555 9,455 24,813 6,445 2,105 7,220 14,971 Invested Capital Stockholders e quity 17,517 33,541 5,946 13,356 2,323 16,444 23,957 Invested Capital 19,072 42,996 30,759 19,801 4,428 23,664 38,928 Capital Turnover 2. 2 3. 30 1. 52 2. 87 1. 44 1. 72 2. 29 ROIC 12. 65% 7. 99% 0. 17% 6. 26% 15. 15% 6. 40% 3. 18% Source European Autos, Deutsche Bank, July 20, 2005 Porsche, Deutsche Bank, September 26, 2005 Thomson Analytics author estimates. Invested Capital = total stockholders equity + gross interest-bearing debt. Capital turnover = sales/invested capital. ROIC (return on invested capital) = EBIT taxes/invested capital. ROIC. It was Porsches return on invested capital (ROIC), however, which had been truly exceptional over time.The companys ROIC in 2004following Deutsche Banks analysis presented in Exhibit 4was 15. 15%. This was clearly superior to all other European automakers BMWs ROIC was second highest at 12. 65%. otherwise major European automakers struggled to reach 6% to 7%. EBITDA (earnings before interest, taxes, wear and tear, and amort ization) is frequently used as the income measure of pure business profitability. EBIT (earnings before interest and taxes) is similar scarce is reduced by depreciation and amortization charges associated with capital asset and gracility write-offs. 6 6 TB0067This ROIC reflected Porsches two-pronged financial strategy 1) superior margins on the narrow only when selective product portfolio and 2) leveraging the capital and capabilities of manufacturing partners in the development and production of two of its three products. The company had successfully exploit the two primary drivers of the ROIC formula ROIC = EBIT after-tax Sales x Sales Invested Capital The first component, operating profits (EBIT, earnings before interest and taxes) after-tax as a part of salesoperating marginwas exceptional at Porsche due to the premium value pricing derived from its global brand of quality and excellence.This allowed Porsche to charge premium prices and achieve some of the largest of margin s in the auto industry. As illustrated in Exhibit 4, Porsches operating profits after-tax of 671 million produced an operating margin after-tax of 10. 55% (671 dual-lane by 6,359 in sales), the highest in the industry in 2004. The second component of ROIC, the capital turnover ratio (sales divided by invested capital) velocityreflected Porsches manufacturing and assembly strategy.By leveraging the Valmet and VW partnerships in the design, production, and assembly of both the Boxster (with Valmet of Finland) and the Cayenne (with Volkswagen of Germany), Porsche had achieved capital turnover ratios which dwarfed those achieved by any other European automaker. Porsches capital turnover ratio had surpassed all other European automakers consistently over the past decade. As illustrated by Exhibit 5, Porsches growing margins and relatively high velocity had sustained a very impressive ROIC for many years. In recent years, however, invested capital had travel faster than sales.But Porsche was not adding doctor assets to its invested capital basis, but bullion. The rising cash balances were the result of retained profits (undistributed to shareholders) and new debt issuances (raising more than 600 million in 2004 alone). As a result, fiscal 2003/04 had proven to be one of Porsches poorest years in ROIC. Exhibit 5 2. 5 Porsches Velocity, Margin, and ROIC Margin amp ROIC 20% Velocity = Sales/Invested Capital 2. 15 2. 0 2. 12 Velocity 1. 97 1. 99 1. 81 18% 1. 91 ROIC (Operating Margin X Velocity) 14. 2% 12. 5% 11. 7% 11. 6% 10. 5% 1. 19 10. 5% 1. 21 9. % 11. 6% 13. 8% 16% 12. 9% 1. 5 14% 12. 6% 11. 9% 12% 10% 1. 0 8. 0% 6. 1% Operating Margin 6. 4% 6. 0% 6. 4% 8% 0. 91 0. 84 6% 0. 5 3. 8% 2. 0% 3. 7% 4% 2% 0. 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 0% Operating margin = ( EBIT Taxes ) / Sales. Invested capital = cash + net working capital + net fixed assets. Porsches minimal levels of invested capital resulted from some rather unique characteristics. Inve sted capital is defined a number of ways, but Vesi used her employers regularise definition of cash positivist net working capital plus net fixed assets. As illustrated in Exhibit 6, Porsches invested capital base TB0067 7 had been growing rapidly in recent years, but not because of excess fixed asset investments. Porsches invested capital was growing primarily because of its accumulation of cash. 8 Vesi was concerned that using this measure of invested capital led to a distorted view of the companys actual performance. Porsches minimal fixed-asset capital base resulted from the explicit strategy of the company as executed over the past decade.The development and manufacturing and assembly of the Cayenne was a clear example Porsche had spent only $420 million in the development of the Cayenne. Auto analysts estimated that any other major automaker would have spent amongst $1. 2 and $1. 8 billion. Porsche had effectively avoided these costs and investments by co-producing the Ca yenne with Volkswagen. The Cayenne shared some 65% of its parts and modules with the VW Touareg, with only 13% of the Cayennes actual wholesale value being derived from parts developed and manufactured by Porsche itself. The production agreement amidst Porsche and VW made VW responsible for all costs associated with quality problems arising at VWs manufacturing facilities. Porsche paid VW a unit price for each Cayenne clay produced in VWs assembly facility in Bratislava, Slovakia. Porsche had successfully off-loaded both cost and risk. Exhibit 6 Asset construction Cash Net working capital Net fixed assets Invested capital Liability Structure Short-term debt Long-term debt bestow debt law Invested capital Porsches managerial Balance Sheet (millions of euros) 996 227 38 487 753 1997 281 116 578 975 1998 466 132 590 1,188 1999 730 225 649 1,604 2000 823 258 755 1,835 2001 1,121 369 960 2,449 2002 1,683 (355) 2,746 4,073 2003 1,766 (382) 3,215 4,599 2004 2,791 403 3,797 6,992 2005 4,325 (131) 3,641 7,834 8 19 27 726 753 7 124 131 844 975 10 114 124 1,064 1,188 52 107 159 1,445 1,604 20 82 102 1,733 1,835 158 (49) 108 2,341 2,449 137 850 987 3,086 4,073 70 859 929 3,670 4,599 649 1,641 2,290 4,702 6,992 1,107 2,026 3,133 4,701 7,834Net working capital = accounts receivable, inventories, and prepaid expenses, less accounts payable and accured expenses. This assumes provisions for risk and charges as equity. Porsche Changes Tack The summer and fall of 2005 saw a series of surprising moves by Porsche. First, Porsche announced that the 1 billion investment to design and manufacture the new Panamera would be largely funded by the company itself. Although the introduction of the Panamera had been anticipated for quite some time, the market was surprised that Porsche intended to design and build the carand its manufacturing facilitynearly totally in-house.The new sports coupe was to be produced in Leipzig, Germany, at t he existing Porsche facility, although a substantial expansion of the plant would be required. As fence to the previous new product introductions, the Boxster and the Cayenne, there would be no major production partner involved. Porsche CEO Wendelin Wiedeking specifically noted this in his press release There are no plans for a joint venture with another car maker. But to ensure the profitability of this new model series, we will cooperate more closely than so far with selected system suppliers. 9 The German share of the value of the Panamera would be roughly 70%. Like the 911, Boxster, and Cayenne, the Panamera would bear the Made in Germany stamp. This methodology defines invested capital by assets, the left-hand side of the managerial balance sheet. Alternative definitions of invested capital focus on the right-hand side of the balance sheet for example, as stockholder equity plus interest-bearing debt. Either version can also be netted for cash holdings under different methods. 8 Porsches cash and marketable securities grew from 2. billion in 2004 to over 4. 3 billion at the end of 2005 (July 31, 2005). Credit Suisse First Boston had in fact noted on September 21, 2005, just days before the VW announcement, that, In our view, the only disappointment is that management indicated that the company would not look into returning cash to shareholders in the next 18 months. 9 Go Ahead for Porsches Fourth Model Series, Porsche Press Release, July 27, 2005. 7 8 TB0067 The second surprise occurred on September 25, 2005, with the announcement to invest 3 billion in VW.Porsche AG, Stuttgart, seeks to acquire a share of approximately 20 percent in the stock capital of Volkswagen AG, Wolfsburg, entitled to vote. Porsche is taking this decision because Volkswagen is now not only an important development partner for Porsche, but also a significant supplier of approximately 30 percent of Porsches sales volume. In the words of Porsches President and CEO Making this invest ment, we seek to secure our business relations with Volkswagen and make a significant contribution to our own future plans on a lasting, long-run basis. Porsche is in a position to finance the acquisition of the intend share in Volkswagen through its own, existing liquidity. After careful examination of this business case, Porsche is confident that the investment will prove profitable for both parties. The planned acquisition is to ensure that there will not be a hostile takeover of Volkswagen by investors not committed to Volkswagens long-term interests. In the words of Porsches President and CEO Our planned investment is the strategic answer to this risk.We wish in this way to ensure the license of the Volkswagen Group in our own interest. This German solution we are want is an essential prerequisite for stable development of the Volkswagen Group and, accordingly, for continuing our cooperation in the interest of both Companies. Acquisition of Stock to Secure Porsches Busine ss, Porsche AG (press release), September 25, 2005. Porsche would spend approximately 3 billion to take a 20% ownership position in VW. This would make Porsche VWs single largest investor, slightly larger than the government of Lower Saxony. 0 It clearly eliminated any possible hostile acquisitions which may have been on the horizon (DaimlerChrysler was rumored to have been interested in raiding VW. ) The announcement was met by near-universal opposition The family linkages in the midst of the two companies were well know. Ferdinand K. Piech, one of the most prominent members of the Piech family which, along with the Porsche family, controlled Porsche, was the power CEO (he retired in 2002) and still Chairman of Volkswagen. He was the grandson of Ferdinand Porsche, the founder of Porsche.Accusations of skirmish of interest were immediate, as were calls for his resignation, and the denial of Porsches request for a seat on VWs board. Although VW officially welcomed the investment b y Porsche, Christian Wulff, VWs board member representing the state of Lower Saxony where VW was headquartered, publicly opposed the investment by Porsche. In the eyes of many, the move by Porsche was a return to German corporate cronyism. For years, Deutschland AG was emblematic of the cosy meshing of cross-shareholdings and shared non-executive directorships that insulated Germany from international capitalism.Wendelin Wiedeking, Porsches chief executive, himself invoked the national angle, saying this German solution was essential to secure VW, Europes largest carmaker, against a possible hostile takeover by short-term investors. Shield for Corporate Germany or a Family Affair? VW and Porsche Close Ranks, Financial Times, Tuesday, September 27, 2005, p. 17. Germany, although long known for complex networks of cross-shareholdings, had effectively unwound most of these in the 1990s.The German government had successfully accelerated the unwinding by making most cross-shareholding liquidations tax- submit in recent years, and both the financial and nonfinancial sectors had sold literally billions of euros in shares. This move by Porsche and VW was seen as more of a personal issueFerdinand Piechrather than a national issue of German alliances. Many Porsche investors had agreed, arguing that if they had cherished to invest in VW, they would have done it themselves. The resulting ownership structure of Volkswagen in October 2005 was 18. 3% Porsche 18. 2% State of Lower Saxony 13. 0% Volkswagen 8. 58% Brandes Investment Partners 3. 5% Capital Group and 38. 19% widely distributed. Porsche still possessed the option to purchase another 3. 4%. 10 TB0067 9 There were also potential strategic conflicts between the two companies. Volkswagens premium segment company, Audi, was a distinct competitor to Porsche, particularly in light of the new Panamera project. VW itself had fallen on bad times (see Exhibit 3), and many VW watchers believed that the company needed activ ist shareholders.VW and its Audi unit were both slimy from high wage costs in German factories, and VW had been seeking wage concessions from many of its unions to regain competitiveness and profitability. Porsche had a reputation of being velvety on German unions, and with the growing presence of both Porsche and Ferdinand Piech, critics feared VW would back away from its wage-reduction push. Porsche was not expected to be as cost-conscious or to push VW to make drastic strategic changes.Instead, Porsche was expected to push VW to underwrite a number of the new models and platforms Porsche was in the process of introducing. There were, in fact, lingering allegations that a number of VWs new product introductions had been delayed by the Cayennes production in 2003 and 2004. Shareholders in Porschethe nonfamily-member shareholderswere both surprised and confused by this dramatic turn of events. Although the arguments for solidifying and securing the Porsche/ VW partnership were rat ional, the cost was not.At 3 billion, this was seemingly an enormous investment in a nonperforming asset. Analysts concluded that the potential returns to shareholders, even in the form of a special dividend, were now postponed indefinitely shareholders would not see the money for years to come. The move was also seen by some as an acknowledgment by Porsche that it could no longer dissipate into new product categories without significantly larger capital and technical resources. self-propelled electrical systems, for example, were increasingly complex and beyond capabilities possessed in-house by Porsche.The interest in VW, Europes second largest automaker to DaimlerChrysler, would surely provide the company with access to key resources. But why werent these resources companionable through partnerships and alliances, without the acquisition of one-fifth ownership in Europes largest moneyloser? The announcement of Porsches intention to take a 20% equity interest in Volkswagen in S eptember 2005 was greeted with outright opposition on the part of many shareholders in both Volkswagen and Porsche. Major investment banks like Deutsche Bank immediately downgraded Porsche from a buy to a sell, arguing that the returns on the massive investment, ome 3 billion, would likely never accrue to shareholders. 11 Although Porsche and VW were currently co-producing the Porsche Cayenne and Volkswagen Touareg, this ownership interest would take the two companies far down a path of cooperation way beyond the manufacture of a sport utility vehicle. Although Porsche had explained its investment decision to be one which would assure the stability of its future cooperation with VW, many critics saw it as a choice of preserving the venture of the Porsche and Piech families at the expense of nonfamily shareholders.The question remained as to whether this was indeed a good or bad investment by Porsche, and good or bad for whom? Vesi wondered if her position on Porsche might have to , in the end, distinguish between the companys ability to generate results for stockholders versus its willingness to do so. Why should a small and highly profitable maker of sports cars suddenly hitch its fortunes to a lumbering and struggling mass-producer? That was the question that some alarmed shareholders asked this week when Porsche, the worlds most profitable carmaker, announced plans to buy 20% stake in Volkswagen (VW), Europes biggest carmaker.To some critics of the deal, Porsches move looked like a return to cosy, German corporatism at its worst. Since January 2002, when a change in the law encouraged German companies to sell their cross-shareholdings in each other, free of capital gains tax, new foreign shareholders have often shaken up fossilised German management. A deal with friendly compatriots from Porsche might turn in VW from this distasteful fate, particularly since foreign hedge funds and corporate raiders have been rumored to be circling VW. Business Keeping I t in the Family, The Economist, October 1, 2005. 1 Porsche We may never see the cash downgrade to sell, Deutsche Bank, September 26, 2005. TB0067 10 Appendix 1 (Millions of euros) Sales Cost of goods sold Gross profits Porsches Statement of Income, 1996-2005 (period ending July 31) 1996 1,438 1,177 261 243 15 64 97 6. 8% 68 29 2. 0% 3 26 1 0 25 1. 7% -1997 2,093 1,648 446 339 21 67 195 9. 3% 108 87 4. 2% 7 81 9 1 70 3. 4% 45. 6% 40. 0% 1998 2,519 1,853 667 439 17 88 334 13. 2% 157 176 7. 0% 13 164 22 142 5. 6% 20. 4% 12. 4% 1999 3,161 2,154 1,007 571 29 84 550 17. % 184 366 11. 6% 12 354 164 191 6. 0% 25. 5% 16. 3% 2000 3,648 2,527 1,121 625 26 114 636 17. 4% 197 439 12. 0% 12 427 220 207 5. 7% 15. 4% 17. 3% 2001 4,441 3,062 1,380 793 61 87 735 16. 5% 133 602 13. 6% 14 588 318 270 6. 1% 21. 8% 21. 2% 2002 4,857 2,981 1,877 914 79 110 1,152 23. 7% 279 873 18. 0% 48 825 363 (0) 462 9. 5% 9. 4% -2. 6% 2003 5,582 3,250 2,332 1,187 116 147 1,4 09 25. 2% 392 1,017 18. 2% 88 928 363 0 565 10. 1% 14. 9% 9. 0% 2004 6,359 3,787 2,572 1,254 99 248 1,665 26. % 525 1,141 17. 9% 58 1,082 470 (4) 616 9. 7% 13. 9% 16. 5% 2005 6,574 3,501 3,073 1,539 172 169 1,875 28. 5% 510 1,365 20. 8% 127 1,238 459 (4) 783 11. 9% 3. 4% -7. 6% Selling, general & admin expenses Non-operating income Other income/expense, net EBITDA EBITDA/sales Depreciation & amortization Earnings before interest and tax EBIT/sales cheer expense on debt Earnings before taxes (EBT) Income taxes Minority interest Net income availabe to common Net income/sales (ROS) Sales growth Earnings growthSource Thomson Analytics, June 2006, and author calculations. Appendix 2 (Millions of euros) Assets Cash amp equivalents Receivables, net Inventories Prepaid expenses summarise current assets Porsches Balance Sheet, 1996-2005 (period ending July 31) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 227 91 199 23 540 0 60 1,324 917 407 21 1,027 281 170 297 47 795 12 5 1,536 994 541 20 1,374 466 196 328 37 1,027 10 5 1,623 1,062 561 14 1,617 730 202 357 42 1,332 30 9 1,683 1,183 501 110 1,981 823 321 396 45 1,585 177 14 1,797 1,310 487 76 2,340 1,121 439 468 29 2,056 253 38 1,960 1,399 561 108 3,016 1,683 638 487 50 2,858 539 39 3,607 1,652 1,955 214 5,604 1,766 823 539 42 3,170 552 42 4,122 1,847 2,276 346 6,385 2,791 939 726 23 4,479 733 21 4,724 2,116 2,607 436 8,276 4,325 971 572 17 5,885 1,211 27 4,486 2,378 2,108 295 9,525Long term receivables Investments in unconsol subsidiaries Property, plant amp equipment, gross Accumulated depreciation Property, plant amp equipment, net Other assets Total Assets Liabilities Accounts payable ST debt amp current portion due LT debt Income taxes payable Other current liabilities reliable liabilities, total Long term debt Provision for risks amp charges Deferred taxes Other liabilities Total liabilities Shareholders Equity Non-equity reser ves & minority interest Common Equity Shareholders equity, total Total liabilities amp shareholders equity Common shares outstanding (millions) 117 8 3 156 283 17 481 1 1 782 148 7 10 241 406 116 541 4 4 1,071 159 10 8 262 439 114 648 n/a 0 1,202 193 52 10 174 429 102 856 n/a 5 1,392 240 20 17 248 525 102 951 (22) 2 1,558 236 158 28 303 725 0 1,312 (52) 2 1,987 305 137 200 1,027 1,668 317 1,619 97 437 4,138 337 70 71 1,378 1,856 337 1,916 173 350 4,631 368 649 61 855 1,933 1,457 2,378 182 2 5,953 440 1,107 187 1,064 2,798 1,985 1,281 36 5 6,105 10 235 245 1,027 17. 5 298 303 1,374 17. 5 0 416 416 1,617 17. 5 2 587 589 1,981 17. 5 0 782 782 2,340 17. 5 0 1,028 1,028 3,016 17. 5 1 1,466 1,467 5,604 17. 5 ( 0) 1,755 1,755 6,385 17. 5 6 2,317 2,323 8,276 17. 5 8 3,412 3,420 9,525 17. 5 Source Thomson Analytics, June 2006, and author calculations. TB0067 11 Appendix 3 (Millions of euros) Porsches Statement of Cash bunk, 1996- 2005 (period ending July 31) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Operating Activities Income before extraordinary items Depreciation & amortization Other Cash Flow Funds From/For Other Operating Activities Net Cash Flow From Operating Activities Investing Activities Capital Expenditures Additions To Other Assets Increase In Investments Disposal of Fixed Assets Net Cash Flow From Investing Activities funding Activities Net Proceeds From Sales/Issue of Com/Prf Stock Com/Prf Purchased,Retired,Converted,Redeemed Long bound Borrowings Inc(Dec) In ST Borrowings Reduction In Long Term Debt Cash Dividends Paid Total Net Cash Flow From Financing Activities Exchange Rate Effect Cash & Cash Equivalents Inc(Dec) 25 74 47 26 171 71 127 (0) 22 220 142 157 (7) 72 363 191 184 23 (5) 392 210 197 11 (22) 396 270 133 16 151 570 462 279 26 611 1,377 565 392 423 77 1,456 612 525 515 (349) 1,303 779 510 42 (157) 1,175 ( 184) (15) (14) ( 214) ( 230) n/a n/a ( 230 ) ( 174) (2) (0) 10 ( 166) ( 145) (12) (7) 27 ( 136) ( 257) n/a n/a 8 ( 249) ( 306) n/a (1) 23 ( 285) ( 1,833) 831 ( 1,002) ( 1,338) n/a 309 ( 1,028) ( 1,265) n/a 478 ( 787) ( 851) (63) (243) 226 ( 932) 0 6 1 8 (30) 0 102 (33) (5) 64 54 0 (13) ( 13) 185 0 49 (21) (22) 6 1 263 0 (36) (22) ( 58) 4 93 0 37 (26) 11 2 298 0 339 (102) (45) 192 (5) 562 0 (39) (297) ( 336) (8) 84 0 639 n/a (0) (59) 580 5 1,025 6 147 (69) 84 (32) 296 Source Thomson Analytics, November 2005, and author calculations. Appendix 4 Porsche Dispenses with inclination in New York Stuttgart. The preferred stock of Dr. Ing. h. c. F. Porsche AG, Stuttgart, will continue to be listed exclusively on German stock exchanges. All considerations about gaining an additional listing in the U. S. A. have been laid aside by the Porsche control board of Management. The sports car manufacturer had been invited to join the New York Stock Exchange at the beginning of the year. The Chairman of the carte du jour of Management at Porsche, Dr.Wendelin Wiedeking explained the decision The appraisal was certainly attractive for us. But we came to the conclusion that a listing in New York would hardly have brought any benefits for us and our shareholders and, on the other hand, would have led to considerable extra costs for the company. The crucial factor in Porsches decision was ultimately the law passed by the U. S. government this summer (the Sarbanes-Oxley Act), whereby the CEO and the Director of Finance of a public limited company listed on a stock exchange in the U. S. A. have to swear that every balance sheet is correct and, in the case of incorrect specifications, are personally liable for high financial penalties and even up to 20 years in prison.In Porsches view, this new American ruling does not match the legal position in Germany. In Germany, the annual financial statement is passed by the entire Board of Management and is then presented to the Supervisory Board, after being audited and certifi ed by chartered accountants. The chartered accountants are commissioned by the general come across of shareholders and they are obliged both to report and to submit the annual financial statement to the Supervisory Board. The annual financial statement is only passed after it is approved by the Supervisory Board. Therefore there is an overall office covering several different committees and, as a rule, involving over 20 persons, including the chartered accountants.The Porsche Director of Finance, Holger P. Harter, made the following comments Nowadays in Germany, the hash out falsification of balance sheets is already punished according to the relevant regulations in the Commercial Code (HGB) and the Company Act (Aktiengesetz). Any special discussion of the Chairman of the Board of Management of the Director of Finance would be illogical because of the intricate network within the decision-making process it would also be hostile with current German law. Source Porsche, News Rel ease of October 16, 2002. 12 TB0067 Appendix 5 Porsches Share Price, 2004-2006 Source www. porsche. com. TB0067 13

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