Volkswagen is one of the world’s top automotive companies with prominent brands like Audi, Bentley, Lamborghini, and Porsche.
Porsche is one of the feathers in Volkswagen’s cap, but many people are unaware that Porsche tried to buy Volkswagen using a creeping takeover.
In the early 2000s, Porsche was an established sportscar manufacturer known for producing high-quality vehicles.
It enjoyed a strong financial performance, aided by its business model, where it did not rely solely on its own manufacturing capabilities to build its vehicles.
Only 20% of Porsche vehicle parts – mostly engine and transmission parts – were manufactured by Porsche. The remainder of manufacturing was outsourced, largely to Volkswagen.
At the time, Volkswagen was a highly inefficient company with a bloated workforce of 174,000.
There were two reasons for Volkswagen’s inefficiencies, labour force influence and government control aided by regulation.
Although the government only had 20.2% voting rights in Volkswagen, the state effectively controlled the carmaker due to German federal laws enacted in 1960.
The law stated that no private shareholder in Volkswagen could have more than 20% voting rights. It also stipulated that the company needed an 80% majority vote on major shareholder issues.
The combination of these laws meant that the German government effectively had majority ownership and could veto any decision made by the remaining shareholders.
Because of its heavy reliance on Volkswagen’s manufacturing capabilities, Porsche knew it had to increase its control to mitigate the risk of its production being affected.
Porsche used debt to start buying Volkswagen shares on the open market. Porsche said that it was merely trying to secure Volkswagen as a strategic partner.
However, at the same time, it secretly bought a large number of options on Volkswagen shares.
Porsche had enough options to buy 75% of Volkswagen’s shares when it became public knowledge.
This news made the short call option holders panic, trying to buy up as many Volkswagen shares as possible to sell to Porsche at an incredible discount.
It caused Volkswagen’s share price to jump to unprecedented levels, temporarily making Volkswagen the most valuable company in the world.
Hedge funds holding short call options on Volkswagen shares were squeezed, which left them with over 2 billion euros in losses.
During this time, another important ruling took place. The European court struck down the Volkswagen law stating that it restricted the free movement of capital in European markets.
This ruling removed a major obstacle in Porsche’s secret quest to gain a controlling stake in Volkswagen.
Porsche’s finances were already stretched, and it could only exercise its rights to buy 51% of Volkswagen’s shares. However, it was enough to become the majority shareholder.
Porche’s escapades carried high costs, and its debt pushed the company to the brink of bankruptcy.
It prevented Porsche from pursuing a complete takeover of Volkswagen, and instead, it proposed a merger.
Volkswagen bought a 49.9% stake in Porsche, but the merger was halted due to legal risks that could arise.
In 2012, Volkswagen turned the tables on Porsche when the sportscar manufacturer was financially weak.
Volkswagen bought the remaining 50.1% shares of Porsche for 4.46 billion Euros, which means it owned 100% of the company.
Today, Volkswagen still owns 75% of Porsche – it sold 25% when Porsche was listed on the Frankfurt stock exchange in 2022.
This saga is an interesting case study of how a corporate and investment battle between Volkswagen and Porsche created an automotive powerhouse.