When Ferdinand Piech took charge of Volkswagen AG (VOW) 20 years ago, the carmaker was losing almost 1 billion euros ($1.24 billion) with its sales tied to the fortunes of the European economy.
Yesterday, the 75-year-old VW chairman capped a spurt of dealmaking with a 4.46-billion euro agreement to buy the rest of Porsche SE’s automaking business, a transaction that will extend the German company’s lead as the world’s most profitable automaker. VW generated a record 11.3 billion euros in operating profit in 2011.
Piech, whose goal is to surpass General Motors Co. (GM) as the world’s largest automaker, has transformed VW into a global carmaker of 12 nameplates, ranging from heavy trucks at MAN SE and Scania AB (SCVB) to Audi sedans and Ducati luxury motorcyles. After an early charge into China orchestrated by the Austrian native, the Wolfsburg-based company now generates more sales from the Asian nation than any other market.
Piech is “at the peak of his working career,” said Stefan Bauknecht, a Frankfurt-based fund manager for Deutsche Bank AG investment vehicle DWS. “However, I don’t think he will sit down now and let everything be. To bring both MAN-Scania and Porsche under the whole VW umbrella means that the daily work now has to start.”
Volkswagen shares rose as much as 7 percent in Frankfurt today in response to the Porsche pact, the structure of which allowed VW to lower a tax bill of 1 billion euros to about 100 million euros. The stock has advanced 51 percent over the past five years, compared with a 57 percent decline for Toyota Motor Corp. (7203) and a 70 percent slump in Renault SA (RNO) stock. General Motors Co. during that period went through bankruptcy to restructure.
After overtaking Toyota as the world’s second-largest carmaker last year, Piech has his sights set on GM. His plan is to sell more cars than the Detroit-based company by 2018.
“Porsche and Volkswagen belong together,” Chief Executive Officer Martin Winterkorn said at a press conference today at VW headquarters in Wolfsburg. “By working with one another we will raise the company to a new level. We are on the way to being number one.”
The grandson of Ferdinand Porsche and a member of the sports-car maker’s board, Piech sat on both sides during a seven-year battle for control between VW and Porsche. He drew criticism from some VW shareholders for remaining silent about Porsche’s 2005 strategy to build up a VW stake despite being aware of the plans weeks before it was publicly announced.
At the time, Piech said that he kept quiet because the VW share price was rising on the market purchases by the then unknown buyer and he didn’t want to inflate the shares more by having information leaks.
Piech backed that strategy, which was being pursued by then-CEO Wendelin Wiedeking, until the 2008 financial crisis pushed Porsche to the brink of bankruptcy. He then helped devise the plan for VW to step in and take control of Porsche instead, crossing his cousin Wolfgang Porsche, the chairman of the sports-car maker’s board.
Piech’s career at Volkswagen began in 1972, when he moved to Audi from Porsche after the family decided to end its active role in the Stuttgart-based manufacturer’s operations. At Audi, he pushed the development of the Quattro all-wheel-drive system, helping establish the brand as an innovator.
The acquisition of Porsche and accelerated integration of Scania with VW brands brings profitable units into the group, with first-quarter profit margins of 18 percent and 12 percent, respectively.
VW management now faces the challenge of integrating Porsche SE (PAH3)’s carmaking operations, folding Ducati into its operations, fashioning a truck alliance with affiliates Scania and MAN and thwarting Suzuki Motor Corp. (7269)’s efforts to force it to return a 19.9 percent stake after their partnership failed.
“The more brands they acquire, the more hard work there is to manage them all,” said investor Bauknecht. Deutsche Bank holds less than 1 percent of Volkswagen stock, according to Bloomberg data. “You need three to five years to see how it worked out and then maybe you can say he was quite successful in bringing all these different brands together.”
VW’s diversification and accumulation of new brands under Piech counters the strategy at its biggest competitors. Fiat SpA (F) last year spun off its Iveco truck operations into Fiat Industrial SpA (FI) to push its integration with Chrysler Group LLC. Ford Motor Co. (F) (F) unloaded Volvo, Jaguar and Land Rover to become leaner. General Motors Co. shuttered the Hummer, Pontiac and Saturn brands and sold Saab as part of its bankruptcy reorganization.
Europe’s second-biggest carmaker, PSA Peugeot Citroen (UG), is meanwhile cutting its workforce and selling assets in its Gefco trucking business as it seeks to cut costs. Chief Executive Officer Philippe Varin told unions last week the carmaker will need to raise its 2012 savings target of 1 billion euros ($1.26 billion), according to Franck Don, a CFTC union representative.
While Volkswagen is able to invest in new brands and products, “Peugeot is in a process of searching for opportunities to ease and improve the net cash position, or improve the net debt position by disposing,” said Marc-Rene Tonn, a Hamburg, Germany-based Warburg Research analyst who rates VW “buy” and Peugeot “hold”. “This shows that VW is in a position to become even stronger in the future.”