Teutonic Turnabout: VW to Acquire Porsche

The $11.3 billion deal would unite two German automakers and end Porsche CEO Wendelin Wiedeking's wild attempt to absorb Volkswagen

By David Kiley

The histories of German automakers Volkswagen (VOWG.DE) and Porsche (PSHG_p.DE) have been intertwined since the 1930s, when Porsche founder Ferdinand Porsche designed for the German government the car that would become the Volkswagen Beetle and launch the company we know today. But this week, the two iconic car companies are expected to announce a deal that will finally unite them under the same ownership.

German media reports, confirmed by executives who have knowledge of the negotiations, point to an agreement that will likely be approved by both companies as early as Thursday, July 23. It is expected to result in Volkswagen buying an initial 49.9% stake in Porsche, with a provision to acquire the rest of the company later for a total price of $11.28 billion.

The markets reacted negatively Monday to the prospect of a deal, in part because of emerging reports from Germany that debt held by Porsche's holding company is close to $20 billion. That is considerably more than the $12 billion to $14 billion that was believed to be on the balance sheet as a result of a complex derivatives scheme the company was pursuing to acquire a controlling ownership of VW last year. There are also unresolved issues that might require a combined VW-Porsche to pay billions in new taxes, a complication that could delay closure of a deal until September and possibly change the financial terms of the deal. VW shares closed down €13.49, or 5.4%, to 236.50 in Frankfurt trading, while shares of Porsche fell by 6.1%, to 48.76, its steepest slide since May 13.

The deal between the two automakers, which is expected to be approved by both boards, would result in the Porsche and Piëch families owning 50% of Volkswagen, with Porsche as a new division in the company, say the same executives. The German state of Lower Saxony will own the same 20% of the company it has since the 1940s, and the Persian Gulf emirate of Qatar and its sovereign wealth fund will own as much as 20%.

Wiedeking "Must Shoulder the Blame"

The combination of the companies is also expected to result in the retirement of Porsche Chief Executive Officer Wendelin Wiedeking, who has been the highest-paid CEO in Europe, with an annual salary topping $100 million. Wiedeking, who has been CEO since 1993, is expected to leave with a "golden parachute" of about $140 million, say industry sources, despite being the architect of the scheme to acquire VW that has piled so much debt on the companies. Despite holding all that debt, Porsche owns about 51% of the company, which is not enough to control its management. Wiedeking was seeking to acquire 75% of VW.

"Wiedeking, along with the company's chief financial officer, Holger Härter, have been largely responsible for the VW takeover strategy and must ultimately shoulder the blame for its failure and Porsche's current debt level," says Tim Urquhart, an auto industry analyst at IHS Global Insight.

Before the global credit markets crashed last fall, Wiedeking's scheme was considered innovative by many media outlets and industry analysts. As late in the meltdown as last January, he was hailed on the cover of Fortune as "The Man Who Outfoxed the Market.

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