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VW and Porsche Agree to Merge

The latest sign of a global industry consolidation.

by on May.07, 2009

The ties between Porsche and Volkswagen date back to the latter's founding, the Beetle developed by Ferdinand Porsche. More recently, they've worked together on the VW Touareg and Porsche's Cayenne, the GTS version shown here.

The ties between Porsche and Volkswagen date back to the latter's founding, the Beetle developed by Ferdinand Porsche. More recently, they've worked together on the VW Touareg and Porsche's Cayenne, the GTS version shown here.

In the latest sign of a rapidly accelerating global automotive consolidation, Volkswagen and Porsche have agreed to merger.

What’s unusual about the deal is that here the Goliath, Europe’s largest automaker, is effectively being taken over by the industry’s David, the small but hugely profitable luxury manufacturer.

That something would happen between the two German manufacturers has been anticipated for months, as Porsche has steadily expanded its stake in the larger automaker, buying up 51 percent of Volkswagen stock.

But VW hasn’t been an entirely passive target.  Its regional government, Lower Saxony, has long held a controlling 20 percent “golden” share in the company and had originally been expected to block a full takeover in order to protect both its investment and the huge job base at Volkswagen’s headquarters factory town.  Wolfsburg sits just miles from where the dividing line between West and East Germany used to run.

The larger maker was established in what was then a provincial town, an hour west of Berlin, as part of Adolph Hitler’s plans to produce a “people’s car,” or “volks wagen.”  Porsche was the designer of what only later became known as the Beetle.  When VW was briefly nationalized by the Allies after the Second World War, Ferdinand Porsche decided to set up his own eponymous company in the southern German city of Stuttgart.

The two companies actually have had long and extensive ties, in many ways reflecting the split between two wings of Ferdinand Porsche’s family.  One of his heirs, Ferdinand Piech, has been a key player at VW for more than a decade, as CEO and then as a senior board member.  Among other things, Piech approved his company’s participation in the joint development and production of a pair of high-line sport-utility vehicles, sold by VW as the Touareg, and by Porsche as the more costly and sporty Cayenne.

Now, it appears, such decisions would be made by a unified management.

“In the final structure 10 brands shall stand below an integrative leading company alongside each other, whereby the independence of all brands and explicitly also of Porsche shall be ensured,” a statement issued by Porsche said.

Exactly how those 10 brands will be integrated, and how the overall corporate management will be shaped are two of the many questions left unanswered by the terse merger announcement.  And there are many other issues yet to be resolved.

Once known for its small, down-market Beetle, Volkswagen has gone through a grand transformation in recent decades.  It now produces everything from economy cars to the luxurious Phaeton under the familiar VW logo.  But it also has collected an assortment of other marques, from the entry-level SEAT and Skoda, based in Spain and the Czech republic, respectively, to luxury makers Audi, Bentley, Lamborghini and Bugatti.

While it’s now the largest manufacturer in Europe, and dominant in the emerging market of China – currently the world’s largest auto market – VW is facing the same problems as rivals like General Motors and Toyota.  The global sales slump has sapped both volume and revenues, leaving makers large and small struggling to fund their operations.

And while having a wide array of brands was traditionally seen as a strength in a steadily-growing automotive world, that’s no longer the case.  In the U.S., for example, GM will eliminate all but four of its divisional nameplates, as part of its desperate restructuring.  Some observers believe VW may have to take similar, if milder steps.  The SEAT (pronounced SEE-aht) brand “has no real identity,” and is struggling for survival, a senior VW executive recently told TheDetroitBureau.com.

Porsche has long been a darling of performance fans, with models like the flagship 911 dominant on track and off.  It nearly collapsed, during the early 1990s, largely due to waning sales in the United States, but under the aggressive stewardship of CEO Wendelin Wiedeking, Porsche has expanded its product line-up, in turn sending sales and profits soaring.

Wiedeking has shown a strong willingness to ignore conventional wisdom, proving, among other things, that there’s a market for a sports car/sport-ute fusion, like Cayenne.  His next big gamble is the Panamera, a four-door sports car, which made its public debut at the Shanghai Motor Show, last month.

But while Porsche has been able to boast one of the world’s largest profit margins, it has also run up a huge debt load.  At $12 billion, it would weigh heavily on even a larger company like VW.

Addressing the combined debt of the two merging companies is likely to become a high priority, and Porsche’s statement makes reference to unspecified “capital measures,” which this is likely to entail.

How quickly the two companies will formally join forces is yet to be answered, but Porsche said, “It is the aim to develop a corresponding basis for decision-making on the future structure of the common group within the next four weeks.”

“We are ready for discussions, which must be carried out quickly,” echoed Christian Wulff, president of Lower Saxony.  Under a special German law, the state will maintain veto power over strategic decisions and will play an active part in the merger efforts, as will VW’s powerful labor unions.

The news about the impending marriage between VW and Porsche comes just as analysts like Joe Phillippi, of AutoTrends Consulting, expect to see a consolidation of the global auto industry — whether through the collapse of weak makers, like Chrysler, or through merger and acquisition.  Late last month, the U.S. maker declared Chapter 11 bankruptcy and is expected to survive only if it can complete a new alliance that will effectively put the Italian maker, Fiat, in charge.  According to some forecasts, there could be as few as six to nine major automotive companies surviving the company shake-out.

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One Response to “VW and Porsche Agree to Merge”

  1. AndrewBoldman says:

    da best. Keep it going! Thank you