It’s all over the financial news and on forums. VW versus Porsche, Piech
versus Wiedeking. Back In January of 2008 a column on this very subject
graced the home page of SCP. So as Porsche was recently able to avoid
bankruptcy by the very same ilk that Wiedeking wanted to dispose of, this
column is worth another visit. |
June 2009 |
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| The most intriguing articles about Porsche in recent weeks involve |
comment and speculation surrounding the company’s financial results and
have nothing to do with their cars. This is not to say that Porsche’s
commitment to its iconic sports cars has in any way wavered, but we can
scarcely be surprised that the market’s attention lies elsewhere. After all, if
any manufacturing company in its past fiscal year made 3.6 Euro trading
stock options with allegedly, a further three and a half billion of additional
profits in its pocket for the current fiscal year, compared with 1 billion Euro
from the operating business, it’s not surprising that the operations are
overlooked. Time to trade the automotive engineering degree for an M.B.A. |
| I do not pretend to understand the analysis in the press concerning |
the nature of Holger Harter’s option strategy. However, while writers in the
Financial Times and other journals are clearly pulling their punches in
deference, presumably, to the marque and its legacy (hey it’s also a profit,
not a loss!), they raise some legitimate questions which non financial readers
(and Porsche car fans) should take note of. It’s been suggested, for
examples, that, given loopholes in European stock exchange reporting
regulations and Porsche’s ability to deflect pressure for greater transparency
in financial reporting, they used their credibility, reinforced with a bid (a bid
allegedly designed from the outset to fail), to increase the value of VW stock,
the value of their VW holdings acquired in 2005 and 2006, and, unseen to
outsiders, the profit of their option trading strategy. The announcement in
November that they would postpone their acquisition offer (the stock price
was too high!!) took that card off the table but by then it appears the 3-4
billion Euro of option profits was in the bag. Some might construe this as a
little too cute. At a minimum, most observers, while restrained in their
comments, construe this as a spectacularly aggressive trading strategy
which has little to do with making cars and makes many of the world’s hedge
fund managers look like underachievers. |
| With no more information with which to better explain the future |
options or hedging strategy of Porsche A.G., most financial writers have
advised caution aimed at Porsche management and, presumably, analysts
and followers of Porsche and VW. Quite apart from the impact that
deteriorating economic conditions may have on consumer spending or credit
and equity markets, it is virtually certain that these extraordinary returns
cannot be repeated and that the “hedging in the normal course of business”
explanation cannot be justified by the underlying activities of the group (if you
exclude the possibility of ‘Texas hedging’, of course). |
| There can be few, and I suspect no, industrial companies in the |
world that in the last few years have, with or without hedging, generated the
same ratio of financial profits to operating income that Porsche demonstrated
in its recent fiscal year (and is likely to demonstrate in the current fiscal
year). This alone should serve as a warning that any continued earnings from
this source and of this magnitude suggest far higher levels of pure financial
risk than can be possibly be warranted. Hopefully, that will not be the case
and we can instead give credit to Porsche for having used this one off
strategy to finance, at essentially no cost, a significant increase in its VW
stake, now worth 14 billion Euro. No harm, no foul – the market has a
tendency to forgive speculation if it’s successful, despite all the initial tut-tut
ting. |
| If indeed this was a one-time phenomenon, it is good news for us |
automobile types. We can now get back to evaluating Porsche as an auto
company, confining our interest and even our concerns to the preservation of
that brilliant heritage built around its legendary sports cars and honed with
studied diversification into vehicles like the Cayenne. We can also focus, as
we should, on the strategic decisions Porsche faces given its now
substantial 31% holding in VW. What is the role of this strategic stake? Is
it merely a financial play or is this to become Porsche’s platform for a global
footprint as a volume manufacturer? In the latter case the nature of Porsche
may change forever. The investment could prove to be a major distraction
from the company’s past and present mission; note for example, current
rumblings from Berlin aimed at protecting VW’s labor force. This might
militate against attempts by Porsche management to restructure parts of VW
and divert important management energy away from the sports car business.
To Porsche followers this should perhaps be the question of the hour. |
| Whatever happens I hope we will see less of these financial profits |
and more of Porsche as the company we know and cherish. However, and
just in case, I will re-subscribe to the Financial Times that will join the raft of
auto magazines which arrive every month. |
