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Family Feuds Behind VW-Porsche Deal

Sports car maker Porsche entered a severe crisis in the early 1990s. There had been a sharp slump in the US market, where Porsche sold half of its vehicles. Toyota offered the equivalent of €1.5 billion ($2.1 billion) for the company, but the family was unwilling to sell. In 1993, the previously unknown head of production, Wendelin Wiedeking, was promoted to CEO. The first five or six years in the position were Wiedeking's best. He was able to shine as the man who turned Porsche around—even if his methods were sometimes unpopular. He brought Japanese consultants into the plant, which the proud Porsche assembly workers in Stuttgart perceived as an insult. On one occasion, the young chief executive walked into the plant, angle grinder in hand, and destroyed iron shelving, to show the suspicious employees that streamlined Japanese-style production required no excess inventory. Wiedeking also shouted at managers, and when someone refused to cooperate, he would threaten to "cut off his balls." Even Ferdinand Piëch, who by then had moved from the top post at Audi to the chairmanship of the VW Group in Wolfsburg, was impressed. He admitted that he couldn't imagine having reorganized Porsche as thoroughly as Wiedeking did. The families proved to be generous. They guaranteed Wiedeking that in the future he would receive roughly 0.9 percent of the company's profits as a bonus. No one could have imagined that the small carmaker's profits would balloon to more than €8 billion ($11.4 billion), earning Wiedeking more than €80 million ($114 million) in annual compensation. Then the second phase of Wiedeking's tenure began, as the Porsche CEO established himself as an outspoken critic of all and sundry. He accused then-Chancellor Helmut Kohl of failing to understand the economy, and he railed against government subsidies, saying: "Luxury and support are incompatible." He was also sharply critical of the wave of mergers in the industry. "If size were the decisive criterion," he said, "the dinosaurs would still be alive." Bigger Cigars, Wider Pinstripes He expressed what many people were thinking. Nevertheless, Wiedeking remained an outsider in the industrial sector, someone who was only allowed to get away with saying the things he said because he was merely the head of a relatively small company. Wiedeking himself portrayed this approach as the secret of his success. He even published a book called "The David Principle," a reference to the Biblical story of David and Goliath. Gradually, the pinstripes on his suits became wider and the cigars bigger. Wiedeking increasingly spoke in the first person when he was talking about the company. He behaved like a business owner and not like a paid manager whose contract could be terminated at any time. This couldn't possibly go over well with someone like Ferdinand Piëch, for whom Wiedeking had become too successful. Perhaps it was because Piëch was unwilling to tolerate anyone being as powerful as he was, or perhaps it was simply due to the fact that the billionaire does not like people who are overly cocky or loud. When Piëch wants to give a manager his opinion, he says, very quietly: "Now that wasn't a good idea at all." Then he is silent for what seems like an eternity, until sweat begins to appear on the other person's forehead. At that point, the manager might as well start packing up his desk. As the head of VW, Piëch also knew that Porsche owed a large share of its success to its cooperation with Volkswagen. For example, the Zuffenhausen-based company would never have managed to develop the Cayenne SVU on its own. And the families' dealership in Salzburg, which had a low public profile, experienced a sharp upswing when VW gave it the import rights for the VW brands Volkswagen, Audi, Skoda and Seat in many Eastern European markets. Other carmakers handle this kind of business themselves, which led to the suspicion that VW had effectively given the Porsche and Piëch families' commercial enterprises a license to print money. Piëch says today that accountants scrutinized the accounts every year to determine whether the Porsche companies had been given preference in decisions made within the VW Group, but that they never found any such evidence. Piëch also insists that as CEO of Volkswagen he consistently abstained from voting on decisions relating to these contracts. A Call from Schröder In any case, the families' Salzburg business grew to become Europe's largest car dealership, providing them with a second mainstay next to the Porsche sports car manufacturing company. But in 2000 Piëch learned, after receiving a call from then-Chancellor Gerhard Schröder, that the future of the two family companies was in jeopardy. Ford CEO Jacques Nasser had asked Schröder whether the German government had any objections to the US automaker acquiring a stake in VW. Having Ford as a new majority shareholder could have put an end to the collaboration with Porsche and the Salzburg dealership. Piëch asked family members whether they were willing to invest in the VW Group instead, but he failed to convince them. Although some members of the clan would have liked to acquire a majority stake in VW subsidiary Audi, they felt that VW itself was too large and too risky. This meant that Piëch had to fend off the attack from the United States on his own. He refuses to reveal how he managed to do so, although he does say that he convinced the Ford CEO "that I was an adversary to be taken seriously." The people at Ford, says Piëch, "quickly gave up." Part 2: The Kafka-Loving CFO Five years later, VW was confronted with yet another takeover plan, when Wiedeking proposed to the families that they invest in VW. He had a unique problem: Porsche had cash reserves worth more than €3 billion ($4.2 billion), which he would otherwise have had to distribute to the shareholders. He also anticipated trouble ahead for Porsche, because the company was too small to be able to continue developing new technologies on its own. The families probably would have been willing to merge their two companies into the VW Group, in return for a stake in the giant Wolfsburg carmaker. But then Porsche's chief financial officer, Holger Härter, appeared on the scene. Härter is a relatively inconspicuous executive who is often unshaven, reads Kafka and is an avid fan of ice hockey. He was seen as one of the smartest managers in the financial sector. Härter, together with investment bankers, had developed a complex model under which Porsche, with its €3 billion ($4.2 billion) in cash, additional loans and options, would acquire a stake in VW. The scheme, a masterpiece of investment banking, would even allow the families to keep their sports car company in Stuttgart and the dealership in Salzburg. For Wiedeking, the VW adventure represented the beginning of the third phase of his tenure as the head of Porsche. The erstwhile David had turned into a Goliath. Nevertheless, Wiedeking's rhetoric hadn't changed, and he continued to rail against corporate raiders who would take over companies and drain their cash reserves to recoup their investments. Ironically, he then applied the same strategy to VW. The Porsche CEO was convinced that he was reaching the high point of his career. In truth, however, Porsche's attempted takeover of VW would mean his downfall—even if it was to make him the highest-paid corporate executive in Germany. Taking on the Sacred Cows Once a year, Wiedeking would invite members of the press to so-called editor-in-chief meetings—secretive, behind-the-scenes gatherings in restaurants. Nevertheless, the group was always large enough to ensure that many of Wiedeking's statements, even if they were made at the bar at 3 a.m., reached the public. He complained bitterly about VW's forays into the luxury segment, including Bentley, Bugatti and the Phaeton—all of them developments for which Ferdinand Piëch was partly responsible. He was critical of the "sacred cows" in Wolfsburg, which included, for example, the company wage agreement. He was also quick to brag, in a poorly concealed way, about his own compensation. "We don't publish board members' salaries," Wiedeking said. "Germany couldn't bear it." At this point, Piëch finally distanced himself from his top employee. He feared that Wiedeking would become a liability for a combined VW-Porsche group, that the Porsche CEO's abrasive manner could soon turn friendly companies into enemies and that the powerful IG Metall union would not stand for his neo-liberal rhetoric. As he had often done before, Piëch used a small act of malice to show his aversion to Wiedeking. At the VW Group's annual meeting, Piëch, as chair of the meeting, referred to the Porsche CEO as "Herr Dr. Wedeking"—and not just once, but several times. The Rise of WoPo By then, however, another member of the clan had assumed a key position: Wolfgang Porsche, nicknamed WoPo. Before that, his public appearances had been limited to the parties he and his second wife, a film producer, attended. Nevertheless, he had been a member of the Porsche supervisory board since 1978 and, in 2007, assumed the chairmanship. Porsche, who moved into his father's office in Zuffenhausen, likes to tell visitors that the desk, chairs and lamps have been there since the days of Ferry Porsche. The automobile designer's original wrenches and screwdrivers, compasses and stencils are still in a drawer in one of the cabinets, carefully sorted by size. An economist by profession, Wolfgang Porsche worked at the German car company Daimler for five years. He imported Yamaha motorcycles and had clear ideas about how to run a company. He was opposed to developing cars at VW that garnered prestige but were unprofitable. On that subject, he agreed with Porsche boss Wiedeking. And he asked: "Why does VW need a Phaeton when Audi already has an A8?" The world of the VW Group was foreign to Wolfgang Porsche. For the Porsche scion, the notion that the works council in Wolfsburg was so powerful, and that VW's head of human resources, Horst Neumann, was even a member of IG Metall, represented a parallel universe to his dynamic world at Porsche. He had said as much many times to his cousin Ferdinand Piëch, who assumed the chairmanship of the Volkswagen supervisory board after stepping down as CEO of VW. "I always tell him everything," he says, "even though it doesn't always do any good." Using the Power Structures Even so, many at Porsche and VW were now paying attention to what WoPo had to say. And when he said in an interview that VW workers ought to return to the assembly lines instead of striking, he didn't have to wait long before hearing a loud response from the works council in Wolfsburg. While his cousin Piëch was intimately familiar with, and knew how to use, the power structures in Wolfsburg, Wolfgang Porsche was content to keep his distance. He long refused to meet with Bernd Osterloh, the head of the VW works council. He argued that Osterloh ought to meet with his counterpart at Porsche, Uwe Hück, instead, saying that this was the appropriate level for discussions. Executives in Wolfsburg became increasingly irritated over Porsche's perceived arrogance. The image Wolfgang Porsche had of the VW Group was very similar to Wiedeking's. Both men saw VW as a company where money had been wasted on luxury models and where the works councils had excessive claims to power. They were determined that this would change when Porsche became a majority shareholder in VW. This alone prompted Wolfgang Porsche to defend Wiedeking against all attacks from then on. But back then, the fact that Wolfgang Porsche had Wiedeking to thank for his now being in a position he had never occupied before may also have played a role. He had become the Herr Porsche and part owner of the giant VW Group. Formally, Wolfgang Porsche now held the most important position within the clan. Because his branch of the family owned more shares in Porsche Automobil Holding, he was the chairman of its supervisory board. The board included three representatives of the Porsche family, but only two Piëchs. Part 3: Piëch's Crafty Chess Game At that point, in the spring of 2008, Ferdinand Piëch seemed to have lost his power. He was still the chairman of VW's supervisory board, but the more shares in VW that Porsche acquired, the stronger was the Stuttgart executives' influence on the Wolfsburg-based automaker. And Wiedeking continued to buy more and more VW shares. The VW board would have been forced into a subordinate position if Porsche had managed to conclude a so-called control agreement with Volkswagen. This would have allowed Porsche to simply ransack VW's financial reserves, thereby forcing VW to partially pay for its own sale. Only two conditions had to be met to conclude such an agreement. First, Porsche needed 75 percent of the VW shares. Second, the so-called "VW Law" had to go. The law provides the state of Lower Saxony, which owns part of VW, with a blocking minority and, therefore, an eternal veto. It seemed that both problems could be solved, but then Ferdinand Piëch demonstrated his mastery of the art of the power struggle. He had already survived scandals that would certainly have cost others their jobs. One was the Lopez case, in which José Ignacio López, a General Motors purchasing executive, had defected to VW, bringing secret documents with him to Wolfsburg. Another was a scandal over payments for lavish foreign trips and prostitutes for VW labor representatives. Piëch initially sought allies in the new conflict, and he found them in the VW works council and Lower Saxony Governor Christian Wulff. He did not allow his choices of allies to be guided by his emotions, however. Theoretically he should have borne a grudge against Wulff, who had tried to replace Piëch on the Wolfsburg supervisory board shortly after Porsche acquired its stake in VW.

Piëch's wife Ursula, who accompanied her Ferdinand to auto shows and company meetings alike, helped smooth out the relationship with Piëch's former enemy. She even asked Wulff to write something on her plaster cast after injuring her arm. When Wulff was named an honorary senator in Salzburg, the Piëchs were among the guests at the ceremony. Piëch and Wulff had a reconciliation and were allies from then on. A Decisive Dinner On April 15, 2008, Wulff met with Chancellor Angela Merkel at Sale e Pepe, a small Italian restaurant in Berlin's Charlottenburg district. Their conversation would prove to be critical to subsequent developments in the power struggle between Porsche and VW. If the European Commission had overturned the VW Law, as it intended to do, Porsche would have had free rein in Wolfsburg. But on that evening, Wulff managed to win over the chancellor. After that, she made sure that Lower Saxony would keep its blocking minority, even with an amended VW Law. The first moves in Piëch's chess game became visible. His next step was to limit Porsche's power in the VW Group. A committee comprised of members of the Wolfsburg supervisory board was to approve all transactions with Porsche in the future. Piëch did not attend the meeting at which a vote was to be taken on the measure. Instead, he submitted his vote in writing. It was an abstention. This gave the 10 labor representatives and Governor Wulff the majority. Wiedeking and Wolfgang Porsche were taken completely by surprise, and they were furious. Piëch had not informed them in advance. But the great strategist had gone too far. His cousin, Wolfgang Porsche, was "appalled," and his own brother, Hans Michel Piëch, normally a levelheaded attorney, distanced himself from Ferdinand Piëch. Some members of the family planned a coup, hoping to unseat Piëch as their representative on the VW supervisory board. They were tired of being made to look like fools by Ferdinand. Piëch played for time. He failed to appear at a scheduled family meeting, and he later told his relatives that there had been no malicious plan behind his voting behavior. He assured them that he supported the efforts to bring Porsche and VW closer together. The planned mutiny fell apart before it could even begin. Most members of the clan were more interested in collecting their dividend and being left in peace. They were no match for Ferdinand Piëch, who had aimed for a grand solution for years: a VW-Porsche Group controlled by his family and, most importantly, with him at the helm. 'Please Say Nice Things about Me' This is Piëch's aim in life and, as it turned out, he was in luck. Ironically, the financial crisis came to his aid. Porsche had made bad investments and was deeply in debt, to the tune of about €10 billion ($14 billion). The VW Group, for its part, had cash reserves of more than €10 billion—and money means power. VW offered to buy the Porsche sports car business. This would allow the Porsche holding company to pay off its debts with the proceeds. But it would also have spelled the end of independence for Porsche. Härter, the chief financial officer, assured Wiedeking that Porsche could solve its debt problem on its own. Wiedeking told Wolfgang Porsche that an investment by the emirate of Qatar could save Porsche. WoPo was only too keen to believe that. But Piëch was staging his own game. On May 11, he and his wife Ursula, looking relaxed, made an appearance on the terrace of a hotel on Sardinia's Costa Smeralda to unveil the new VW Polo to several dozen journalists. They listened raptly to the words of the patriarch, who dispatched his rival in a few short sentences. "At the moment, I still have confidence in Wiedeking," he said. Then, after a short pause, Piëch added: "Delete the word 'still.'" He said that he didn't expect Wiedeking to go without a fight. The Porsche CEO would have to "step down several levels," Piëch said, going from all-powerful boss to a "more humble" position. Later, Ursula Piëch urged her husband to stop talking. "Anything you can't get done by 11 p.m. isn't going to happen," she said. "And only rogues go to bed at midnight." The two smiled distractedly, and Piëch took his leave with the words: "Please say nice things about me." Wiedeking is putting up a fight. Help from Qatar is his last hope, but the Qataris, reluctant to become involved in a feud between the two families and the two companies, insist that they will only invest after the parties have come to terms, and that they will be investing in VW, not Porsche. Time to Shut Up Wolfgang Porsche, for his part, refuses to admit defeat, at least not in public. When Porsche works council chairman Uwe Hück asked him last week where things stood, he said: "Everything is still up in the air." He even denied plans to dismiss Wiedeking. Instead, he launched into an attack on Christian Wulff, saying that it was time for the governor to "finally shut up." The Porsche and Piëch families have long come to terms over the future of the two companies. A decision could be made as early as the supervisory board meeting this Thursday. Under the plan, Porsche AG will be sold to VW in two stages. VW will initially acquire 49.9 percent of Porsche, and it will purchase the remaining shares at a later date. Porsche Automobil Holding will likely receive about €8 billion ($11.2 billion) for the shares, which will allow it to pay off most of its debt. VW may even acquire the families' Salzburg dealership, which would likely fetch more than €3 billion ($4.2 billion). In return, the families will keep more than 50 percent of a combined VW-Porsche Group. The state of Lower Saxony will retain its 20 percent share, while Qatar will acquire a package of between 14.9 and 19.9 percent. The assets of the Porsches and Piëchs have multiplied. Before the investment in Wolfsburg, they owned 100 percent of Porsche, a small sports car maker. Now they own more than half of the world's second-largest automobile group. As dirty as it was, it was an extraordinarily profitable family feud. The merger places the German-Austrian industrialist clan on a level with the world's biggest corporate dynasties: the Fords, the Agnellis and the Peugeots. The Next Generation Nevertheless, Wolfgang Porsche emerges as the loser in this contest. Although he will remain chairman of the supervisory board of Porsche Automobil Holding, its role will be minimal in the future. He also faces the uncomfortable prospect of being viewed as a traitor by Porsche employees, having failed to prevent the sale to VW. Will he be booed by employees on Sept. 19, when they celebrate the 100th birthday of his deceased father Ferry at the new Porsche Museum? Ordinary mortals may smile at such worries, but it's a serious issue for Wolfgang Porsche—and one that shows that the past is unlikely to be forgotten in either of the two families. Many questions remain unanswered. For example, how many millions will Wiedeking take with him as his golden parachute? What role do the sheikhs from Qatar want to play in Wolfsburg? How will the small sports car maker fare as a new brand within the large VW empire? And, perhaps most importantly, will the combined VW-Porsche corporation become a new battleground for the feuds of the Porsche-Piëch clan? Things will get truly exciting when the next generation of both families takes the reins. When that happens, even more people will have a say in the future of the automobile group. Ferdinand Piëch stands the best chance that one of his children will have inherited the automobile genes from him. He once said that the youngest of his 12 children was best suited to fill his shoes. But he is still a teenager—and he doesn't even have a driver's license yet. Translated from the German by Christopher Sultan

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