There was an old, annoyingly repetitive song on the nightclub circuit from the late ’50s, which must have seemed more amusing to an audience who’d had more than a few drinks, and which ran, over and over:Here we go, round again Singin’ a song about Molly Dee: Far away, I know not where, She’s the girl who waits for me . . .
I was somehow reminded of this when I saw this morning that Volkswagen’s Ferdinand Piëch has managed, yet again, to pick the pockets of shareholders, and make himself both richer and more powerful in the process. I am referring, of course, to today’s announcement that VW has come up with a tax-efficient way to buy up the 50.1% of Porsche it doesn’t already own. It is buying this asset from the Porsche holding company, whose principal asset is, not Porsche, but 50.7% of—Volkswagen! The deal was/will be approved because Porsche SE, the holding company, is 90% owned by Ferdinand Piëch and his relatives. As for the preferred shareholders in Porsche AG, the famed auto manufacturer, they will get—nothing.
I bring this up on a blog devoted to corporate governance because Herr Piëch’s governance practices have been the subject of dismay by better-governance advocates within and outside Germany at least since the middle 1990′s, after Piëch had succeeded to the job of CEO at Volkswagen. At the time, his autocratic management style, and refusal to talk to shareholders seemed balanced by his successes in repositioning Audi as a luxury car brand, and in saving VW from possible economic disaster. In the German two-tiered board system, there was a separate Supervisory Board to which he had to report, dominated by the State of Lower Saxony, which had a historical and statutory role, two seats on the board as long as it owned at least 15% of the equity, and a supposedly privileged political position. But thanks to German co-determination, by which every company of more than very small size must have an equal representation of employees and shareholder representatives on the Supervisory Board, Piëch had already made a practice of buying support of at least one half the board through labor concessions and (we learned years later) some instances of outright bribery. He was a fine engineer and a capable executive, but his priorities were always personal power, product innovations, sales growth, labor peace, profitability, and return to shareholders, in that order: shareholders came last.
Several times, in the face of record earnings, Piëch declined to raise, or even cut the dividend, to save the cash to buy up other enterprises (such as the absurd—and ultimately unsuccessful—struggle with BMW to buy Rolls-Royce, solely for the prestige of the name), to plead poverty to the tax authorities or to aid labor negotiations, to make the labor unions happy whenever pay freezes or modest cuts were on order (always outside Germany, and therefore not the concern of the union representatives on the Supervisory Board.)
When Piëch was obliged by age limit to retire as CEO, he submitted his name for candidacy as a member of the Supervisory Board, with the stated promise that he would become its chairman. This was no longer best practice in Germany and was strongly opposed by a significant number of shareholders. It was infuriating that when I talked to the largest American shareholder in the company, they said they wanted to “wait and see” how Piëch did. Of course, with five-year terms and this chairman’s ability to pack the board, there could be no second chance to vote him out.
Since then, he has played the same games, over and over again, VW’s creeping takeovers of MAN (which he also now chairs) and Scania being the most egregious examples. The benefit to minority shareholders has always been nil. As a member of the Porsche family (he is Ferdinand Porsche’s grandson), the second-largest shareholder of Porsche, and also the private owner of one of the largest VW-Audi distributorship networks in Europe, Piëch has been at the center of many financial ties between VW and the Porsche family from which the original Beetle had sprung. However, intra-familial relations have not always been cordial. When Porsche CEO Wedelin Wedeking, together with one of Piëch’s cousins, Wolfgang Porsche, came up with the mad scheme of trying to covertly buy control of VW through the use of re-sale agreements and options concealed through third-party nominal owners, Piëch fought back. In theory, Porsche had acquired a blocking minority and effective control of VW. Speculators rushed in, hedge funds began to short the stock, a short squeeze developed, and for a time, VW had the highest market capitalization in the world, and almost no float. But Porsche’s control had been bought entirely with borrowed money.
Porsche’s voting shares were owned entirely by family members; the publicly-traded shares were all non-voting preferreds. By squeezing the by-then extremely highly-leveraged much smaller company, and lining up some family support within the voting equity, Piëch and VW were able to outlast Porsche and threaten them with bankruptcy. Instead, VW ended up controlling Porsche (with Piëch as the very rich minority owner of 12.8% of the overvalued sports car maker) which in turn controlled Volkswagen. So far, the net effect upon shareholders in VW had been very negative, most of them selling the overvalued shares into what they thought was a speculative bubble, only to discover that there had been a secret battle for control, and that they were badly underweight the artificially-inflated company. Those who repurchased the shares as the bubble deflated, discovered that there was to be no bid forthcoming, but rather a private deal by which Porsche would be reorganized into a holding and an operating company, with VW to own 49.9% of the holding company via the formerly unquoted Porsche family shares, with an option to buy the rest whenever tax considerations and financing would permit. VW owned itself via Porsche Holding, and the minority shareholders owned—very little. Wedeking and Wolfgang Porsche were forced out, and Piëch was in control of the company founded by his grandfather, from which family participation in management had been banned by family agreement since 1972. All without paying minority shareholders a cent.
Does anyone notice a pattern here? Yet hope springs eternal. Many banks actually began recommending purchase of Porsche preferred shares because of their theoretical asset value, and with the argument that eventually, Volkswagen would have to pay them something to buy out their interest in the very profitable operating company. Wrong again. Today, we learned that VW’s lawyers had figured out a way to acquire the other 50.1% of Porsche Holding, without all the negative tax consequences, and at roughly the option price. VW will own all of Porsche, without having paid a premium to any of the outside shareholders, and therefore will have repurchased itself at no premium, obtaining Porsche in the bargain. Porsche’s preferred shareholders will own non-voting shares in a subsidiary of Volkswagen. Of course, suddenly cash-rich Porsche could have a special distribution to the long-suffering preferred owners? Don’t make me laugh. The family owners of the holding company have just had a vote to use the cash to diversify into other businesses.
And yet investment managers will insist that there is no added value in evaluating corporate governance. Anyone who had paid any attention at all to the machinations of Herr Dr. Piëch since the 1990s knew that he would never go through the markets if he could go around them, and that he had always managed to do so. All those who have expected to profit from the growth of VW and then its consolidation of the European truck business, heavy diesels, the fight for control with Porsche, and finally the acquisition of Porsche itself, have always come up empty-handed. Paying attention to governance defects would have saved them a fortune. But of course, that’s all box-ticking nonsense. Just ask Ferdinand Piëch.