'Porsche Changes Tack\r'

'Porsche C go downes Tack Yes, of course, we have heard of sh argo in a flashner value. and that does non remove the fact that we stick customers first, so workers, then melody let onners, suppliers and dealers, and then shargonowners. Dr. Wendelin Wiedeking, CEO, Porsche, peter come out of the closet Zeit, April 17, 2005. Porsche had ever been different. pedagogys by Porsche leaders, like the whiz above, continuously do Veselina (Vesi) Dinova nervous about the association’s attitude about creating shareholder value. The gild was a paradox.Porsche’s attitudes and activities were like that of a family-owned firm, and it had succeeded in creating substantial dowryholder value for to a greater extent than a decade. Porsche’s CEO, Dr. Wendelin Wiedeking, had been credited with clarity of de enclosureination and assurance of exe compaction. As one colleague described him: â€Å"He grew up PSD: poor, smart, and drudgen. ” Porsche’s management of deuce minds had created awe in the marketplace as to which value marriage proposal Porsche presented. Was Porsche continuing to develop an organizational revolve around on shareholder value, or was it egressing to its to a greater extent than traditional German roots of stakeholder swel refer economy?Simply put, was Porsche’s leadership building value for tout ensemble shareholders, including the irresponsible families, or was it pursuing family objectives at the depreciate of the shareholder? Vesi had to make a recommendation to her investiture commissioning tomorrow, and the evidence was confusing at beaver. make outholder wealthiness or Stakeholder hoodism? Vesi’s dilemma was whether Porscheâ€Porsche’s leadershipâ€was increasely pursuing shareholder wealth maximization or the more traditional Continental European mannequin of stakeholder corkingism.Shareholder Wealth Maximization. The Anglo-American marketsâ€the fal l in States and get together Kingdom primarilyâ€have followed the philosophy that a firm’s objective should be shareholder wealth maximization. More specifically, the firm should strive to increase the egest to shareholders, as measured by the affection of swell gains and dividends. This philosophy is based on the confidence that course markets are efficient; that is, the share footing is al way of lifes correct, and quickly incorporates all fresh randomness about expectations of return and attempt.Share prices, in turn, are deemed the best allocators of heavy(p) in the macro economy. Agency possibleness is the subjugate of how shareholders can motivate management to swallow up the prescriptions of shareholder wealth. For ex deoxyadenosine monophosphatele, liberal use of stock options should come on management to think like shareholders. If, however, management deviates as well as far from shareholder objectives, the beau monde’s age of directors i s responsible for replacing them. In cases where the bill is likewise weak or ingrown to take this action, the take aim of the equity markets could do it with a takeoer.This ch axerophtholaign is made possible by the one-share-one-vote rule that exists in approximately Anglo-American markets. Copyright © 2007 Thunderbird School of Global Management. e substantially rights reserved. This case was prepared by Professor Michael H. Moffett for the purpose of classroom discussion whole, and non to indicate every effective or ineffective management. Special give thanks to Wesley Edens and Pilar Garcia-Heras, MBA ‘06, for case-writing assistance. Stakeholder swellism. In the non-Anglo-American markets, particularly continental Europe, arbitrary shareholders excessively strive to maximize long returns to equity.However, they are more constrained by virile an different(a)(prenominal) stakeholders like creditors, delve unions, g everywherenments, and regional entit ies. In particular, delve unions are often much more powerful than in the Anglo-American markets. G everywherenments often intervene more in the marketplace to protect measurable stakeholder sakis in local communities, such as environmental protection and affair needs. sticks and different financial institutions often have cross-memberships on corporate boards, and as a result are frequently quite influential. This mannequin has been labe guide stakeholder capitalism.Stakeholder capitalism does not assume that equity markets are each efficient or inefficient. Efficiency is not rightfully critical because the firm’s pecuniary goals are not exclusively shareholder-oriented since they are constrained by the new(prenominal) stakeholders. In any case, stakeholder capitalism assumes that long-term â€Å"loyal” shareholdersâ€typically, controlling shareholders†kinda than the transient portfolio investor should deflect corporate strategy. Although s ome(prenominal)(prenominal) philosophies have their strengths and weaknesses, two trends in recent divisions have led to an increasing focus on shareholder wealth. first gear, as more of the non-Anglo-American markets have increasingly privatized their industries, the shareholder wealth focus is manifestly undeniable to attract inter internal capital from outside investors, some(prenominal) of whom are from other countries. Second, and fluid quite contr all oversial, some(prenominal) analysts believe that shareholder-based multinationals are increasingly dominating their globose industry ingredients. Porsche AG I know exactly what I want and what must(prenominal) happen. I am the real one. You can be sure. Dr. Wendelin Wiedeking Porsche AG was a in public traded, closely held, German-based rail gondola manufacturer.Porsche’s prexy and Chief closing noble Officer, Dr. Wendelin Wiedeking, had returned the familiarity to both status and profitability since taki ng over the company in 1993. Wiedeking’s background was in crosswayion, and many a(prenominal) had questioned whether he was the right man for the job. instantaneously later onwards taking over Porsche, he had killed the 928 and 968 work platforms to reduce interlockingity and cost, although at the time this go off the company with yet one platform, the 911. Wiedeking had then brought in a group of Japanese manufacturing consultants, in the Toyota tradition, who led the complete overhaul of the company’s manufacturing processes. Wiedeking himself made youngfangleds when he walked down the outpution literary argument with a circular saw, cutting off the shelving which held move. Porsche had unopen the 2004/05 fiscal family ( ratiocination July 2005) with €6. 7 trillion in gross sales and €721 one thousand million in profit after-tax. Wiedeking and his team up were credited with the wholesale turnaround of the supererogatoryty manufactu rer. Strategically, the leadership team had now runed the company’s business line to reduce its dependence on the luxury sports car market, historically an extremely cyclic business line.Although Porsche was traded on the Frankfurt Stock trade (and associated German exchanges), control of the company remained firmly in the hands of the founding families, the Porsche and Piech families. Porsche had two classes of shares, ordinary and appreciation. The two families held all 8. 75 million ordinary sharesâ€the shares which held all voting rights. The second class of share, mouthful shares, participated merely in shekels. All 8. 75 million preference shares were in public traded. Approximately 50% of all preference shares were held by large institutional investors in the united States, Germany, and the get together Kingdom; 14% were eld by the Porsche and Piech families; and 36% were held by small private investors. As noted by the Chief monetary Officer, Holger Hart er, â€Å"As long as the two families hold on to their stock portfolios, there won’t be any external influence on company-related decisions. I have no doubt that the families will hang on to their shares. ” One of the consultants, focused on run for manufacturing techniques and Porsche’s overwhelming levels of subcomponent assemblies and various automotive split and inventory, was quoted as saying, â€Å"Where is the car factory? This looks like a mover’s warehouse. 1 2 TB0067 Porsche was just about infamous for its independent thought and occasional pigheadedness when it came to disclosure and compliance with flooring requirementsâ€the prerequisites of being publicly traded. In 2002, the company had chosen not to list on the New York Stock Exchange after the passage of the Sarbanes-Oxley Act. The company pointed to the specific requirement of Sarbanes-Oxley that of age(p) management sign off on the financial results of the company personally as inconsistent with German law (which it for the most part was) and illogical for management to accept.Management had alike long been critical of the practice of every quarter reporting, and had in fact been removed from the Frankfurt exchange’s stock index in folk 2002 because of its refusal to report quarterly financial results (Porsche still reports operating and financial results notwithstanding semi-annually). Porsche’s management move to fence that the company believed itself to be quite seasonal in its ope proportionalityns, and did not wish to report quarterly. It also believed that quarterly reporting only added to short-term investor perspectives, a realize which Porsche felt no need to fuel (see appendage 4). break 1 7,000 Porsche’s Growth in gross sales, Income and delimitation run permissiveness 28% Millions of euros (€) sales 6,000 20. 8% 5,000 18. 0% 18. 2% 17. 9% 20% 24% 4,000 13. 6% 3,000 11. 6% 12. 0% 16% in operation(p) permissiveness (EBIT / Sales) 12% 2,000 7. 0% Operating Income (EBIT) 8% 4. 2% 1,000 2. 0% 0 1996 1997 1998 1999 2000 2001 2002 2003 4% 0% 2004 2005 descent: EBIT = profits before elicit and tax. But, after all was said and done, the company had just inform enrol internet for the tenth consecutive year (see Exhibit 1).Returns were so earnest and had grown so steadily that the company had paid out a particular(a) dividend of €14 per share in 2002, in addition to increasing the size of the regular dividend. The company’s critics had argued that this was simply another way in which the controlling families drained profits from the company. There was a continuing concern that management came first. In the spoken language of one analyst, â€Å"… we think there is the potential risk that management whitethorn not rate shareholders’ takes very upliftedly. ” The motivations of Porsche’s leadership team had long been the proceeds of debate .The allowance packages of Porsche’s senior management team were nearly exclusively focused on new year profitability (83% of executive board compensation was based on performance-related pay), with no management incentives or stock option awards related to the company’s share price. Porsche clearly focused on the company’s own ope rational and financial results, not the market’s valuationâ€or thinkingâ€of the company. Leadership, however, had clearly built value for all stakeholders in recent age, TB0067 3 nd had dual-lane many of the fruits of the business, in the form of bountyes, with both management and labor alike. â€Å"We are aware that our lofty ambitions for wares, processes, and customer expiation can only be achieved with the wear of a high-quality and well-motivated team. Here at Porsche, we have such a teamâ€and we believe that they should share in the success of the company by means of special bonus payments. ”2 Po rsche’s Growing Portfolio Porsche’s proceeds portfolio had undergone evidential change as CEO Wiedeking pursued his promise to shareholders that he would grow the firm.The company had lead major vehicle platforms: the premier luxury sports car, the 911; the competitively priced Boxster roadster; and the recently introduced off-road sport expediency vehicle, the chili. Porsche had also recently announce that it would be adding a poop platform, the Panamera, which would be a high-end sedan to compete with Jaguar, Mercedes, and Bentley. 911. The 911 serial publication was still the focal point of the Porsche brand, but many believed that it was festering old and due for replacement. Sales had seemingly peaked in 2001/02, and fallen back more than 15% in 2002/03.The 911 was a highly actual series with more than 14 current models carrying the 911 tag. The 911 had always enjoyed nearly exclusive self-control of its market segment. Prices continued to be high, and margins some of the very highest in the global auto industry for employment models. Although its sales had been historically cyclical, 911 demand was not priceelastic. The 911 was the only Porsche model which was make and assembled in-house. Boxster. The Boxster roadster had been introduced in 1996 as Porsche’s foundation into the lower-price end of the sports car market, and had been by all measures a very big success.The Boxster was also considered an anticyclical move, because the traditional 911 was so high priced that its sales were heavily dependent on the disposable income of corrupters in its major markets (Europe, the United States, and the United Kingdom). The Boxster’s lower price made it inexpensive and less sensitive to the business cycle. It did, however, compete in an increasingly competitive market segment. Although the Boxster had competed head-to-head with the BMW Z3 since its conception in 1996, the entryway of the Z4 in 2003 had drastically c ut into Boxster sales. Boxster sales volumes had peaked in 2000/01.Volume sales in 2003/04 were down to 12,988, less than half what they had been at peak. jalapeno. The terce major platform innovation was Porsche’s launch into the sports utility vehicle (SUV) segment, the Cayenne. Clearly at the slip by end of the market (2002/03 Cayenne sales averaged more than $70,000 each), the Cayenne had been a very quick success, in particular in the SUVcrazed American market. The Cayenne introduction was considered by many as one of the most victorious new product launches in history, and had angiotensin-converting enzyme-handedly floated Porsche sales numbers in recent old age.The Cayenne’s success had been plane more dramatic given(p) much pre-launch criticism that the market would not support such a high-priced SUV, particularly one which shared a strong blood-line with the Volkswagen (VW) Touareg. The Porsche Cayenne and VW Touareg had been collectively developed by the two companies. The two vehicles shared a common chassis, and in fact were both manufactured at the same factory in Bratislava, Slovakia. To preserve its quaint identity, however, Porsche shipped the Cayenne chassis 17 hours by rail to its facility in Leipzig, Germany, where the engine, drive â€Å"Porsche Stays on Course,” Dr.Wendelin Wiedeking, President and Chief Executive Officer, Porsche Annual Report 2003/04, p. 5. 2 4 TB0067 train, and home(a) were combined in final company. 3 A new six-cylinder discrepancy was introduced in 2004 to buoy Cayenne sales after the initial boom of the introduction year, by offering a importantly cheaper model choice. 4 As illustrated by Exhibit 2, Porsche’s platform innovations had successfully grown sales volumes over the past decade. Exhibit 2 Units 0,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Note: Excludes sales of the discontinued 928 and 944/9 68 models in 1994-1996. These models totaled 1005 in 1995 and 104 in 1006. 911 sales in 2004 and 2005 include 222 and 660 Carrera GTs, respectively. Porsche’s Expanding Platforms and Growing Sales 911 Boxster Cayenne Panamera. On July 27, 2005, Porsche announced that it would proceed with the development and turnout of a quaternary major modelâ€the Panamera. The name was derived from the legendary Carrera Panamericana trunk call road race held for many eld in Mexico.The Panamera would be a bounteousness class, four-door, four-seat sports coupe, and would compete with the pension sedan models produced by Mercedes Benz and Bentley. Pricing was pass judgment to arrive at $125,000, rising to $175,000. Production was scheduled to take in 2009 at a scale of 20,000 units per year. This new model would give Porsche a competitive instalment in every major premium-product market segment. The well-nigh Profitable Automobile Company in the orb Porsche’s financial per formance and health, by auto manufacturer standards, European or elsewhere, was excellent.It was clearly the smallest of the major European-based manufacturers with total sales of €6. 4 billion in 2004. 5 This was in comparison to DaimlerChrysler’s €142 billion in sales, and Volkswagen’s The engine was, in fact, the only part of the Cayenne which was actually manufactured by Porsche itself. All other components of the vehicle were either outsourced or built in conjunction with other manufacturers. 4 The six-cylinder engine, however, was actually a Volkswagen engine which had been reconfigured. This had led to significant debate, as Porsche was criticized for degrading the Porsche brand. Comparing Porsche’s financial results with other major automakers is problematic. First, Porsche’s fiscal year ends July 31. Hence Porsche’s financial results for 2004 reported in Exhibit 3 are those for the August 1, 2003, by July 31, 2004, period. Sec ondly, Porsche announced that commencement ceremony with the 2004/05 period, which ended July 31, 2005, it would move to InternationalFinancial coverage Standards (IFRS), rather than the German commercial Code and special accounting requirements of the German Stock Corporation police force (German Generally Accepted Accounting Principles) which it has followed since it went public in 1984.These results will not be comparable to forward reporting years, and will require both Porsche and its analysts to theorise its financial history following IFRS. 3 TB0067 5 €89 billion. But, as illustrated in Exhibit 3, Porsche was owing(p) by all metrics of profitability and return on invested capital. Porsche’s EBITDA, EBIT, and net income margins were the highest among all European automakers in 2004. 6 What also always stood out about Porsche was the average revenue per vehicle. At €83,671, only DaimlerChrysler was even close. Exhibit 3 European auto maker BMW DaimlerC hrysler ordering Peugeot Porsche Renault VolkswagenPorshe’s Competitive Positioning, 2004 dinero Measures Sales (millions) € 44,335 € 142,059 € 46,703 € 56,797 € 6,359 € 40,715 € 88,963 Revenue per vehicle € 39,622 € 78,056 € 28,844 € 19,354 € 83,671 € 19,291 € 18,369 EBITDA € 5,780 € 10,280 € 2,190 € 4,502 € 1,665 € 4,414 € 7,140 EBIT € 3,745 € 4,612 € 22 € 1,916 € 1,141 € 2,148 € 1,620 Net Income € 2,222 € 2,466 -€ 1,586 € 1,357 € 616 € 3,551 € 677 EBITDA border 13. 0% 7. 2% 4. 7% 7. 9% 26. 2% 10. 8% 8. 0% border Measures EBIT Net Income Margin Margin 8. 4% 5. 0% 3. 2% 1. 7% 0. 0% -3. 4% 3. 4% 2. 4% 17. 9% 9. 7% 5. 3% 8. 7% 1. % 0. 8% rise: â€Å"European Autos,” Deutsche Bank, July 20, 2005; â€Å"Porsche,” Deutsche Bank, September 26, 2005; Thomso n Analytics; author estimates. Renault’s results include 343 million in sinful income in 2004, accounting for net income exceeding EBIT. Porsche’s financial results, however, had been the subject of substantial debate in recent years as upwards of 40% of operating profit were thought to be derived from currency hedging. Porsche’s cost-base was stringently European euro; it produced in only two countries, Germany and Finland, and both were euro area members.Porsche believed that the quality of its engineering and manufacturing were at the gist of its brand, and it was not willing to move labor beyond Europe (BMW, Mercedes, and VW had all been manufacturing in both the United States and Mexico for years). Porsche’s sales by currency in 2004 were roughly 45% European euro, 40% U. S. dollar, 10% British pound sterling, and 5% other (primarily the Japanese yen and Swiss franc). Porsche’s leadership had undertaken a very aggressive currency hedging strategy beginning in 2001 when the euro was at a record low against the U.S. dollar. In the following years, these financial hedges (currency derivatives) proved extremely utile. For ex angstrom unitle, nearly 43% of operating earnings in 2003 were thought to have been derived from hedging activities. Although profitable, many analysts argued the company was increasingly an coronation funds banking firm rather than an automaker, and was heavily exposed to the unpredictable fluctuations amidst the conception’s two most powerful currencies, the dollar and the euro. Exhibit 4 European Automaker BMW DaimlerChrysler Fiat Peugeot Porsche Renault VolkswagenReturn on Invested ceiling (ROIC) for European Automakers, 2004 Operating Margin Sales (millions) € 44,335 € 142,059 € 46,703 € 56,797 € 6,359 € 40,715 € 88,963 EBIT € 3,745 € 4,612 € 22 € 1,916 € 1,141 € 2,148 € 1,620 Taxes € 1,332 à ¢â€šÂ¬ 1,177 -€ 29 € 676 € 470 € 634 € 383 EBIT After-tax € 2,413 € 3,435 € 51 € 1,240 € 671 € 1,514 € 1,237 affair Bearing debt € 1,555 € 9,455 € 24,813 € 6,445 € 2,105 € 7,220 € 14,971 Invested capital of the United States Stockholders equity € 17,517 € 33,541 € 5,946 € 13,356 € 2,323 € 16,444 € 23,957 Invested Capital € 19,072 € 42,996 € 30,759 € 19,801 € 4,428 € 23,664 € 38,928 Capital Turnover 2. 2 3. 30 1. 52 2. 87 1. 44 1. 72 2. 29 ROIC 12. 65% 7. 99% 0. 17% 6. 26% 15. 15% 6. 40% 3. 18% generator: â€Å"European Autos,” Deutsche Bank, July 20, 2005; â€Å"Porsche,” Deutsche Bank, September 26, 2005; Thomson Analytics; author estimates. Invested Capital = total stockholders’ equity + gross interest-bearing debt. Capital turnover = sales/invested capital. ROIC (return on invested capital) = EBIT †taxes/invested capital. ROIC. It was Porsche’s return on invested capital (ROIC), however, which had been truly exceptional over time.The company’s ROIC in 2004â€following Deutsche Bank’s analysis presented in Exhibit 4â€was 15. 15%. This was clearly superb to all other European automakers; BMW’s ROIC was second highest at 12. 65%. another(prenominal) major European automakers struggled to reach 6% to 7%. EBITDA (earnings before interest, taxes, dispraise, and amortization) is frequently used as the income measure of pure business profitability. EBIT (earnings before interest and taxes) is similar but is reduced by depreciation and amortization charges associated with capital asset and skilfulwill write-offs. 6 6 TB0067This ROIC reflected Porsche’s two-pronged financial strategy: 1) superior margins on the narrow but selective product portfolio; and 2) leveraging the capital and capabilities of manufacturing partners in the development and production of two of its three products. The company had successfully put-upon the two primary drivers of the ROIC formula: ROIC = EBIT after-tax Sales x Sales Invested Capital The first component, operating profits (EBIT, earnings before interest and taxes) after-tax as a shareage of salesâ€operating marginâ€was exceptional at Porsche due to the premium value determine derived from its global brand of quality and excellence.This allowed Porsche to charge premium prices and achieve some of the largest of margins in the auto industry. As illustrated in Exhibit 4, Porsche’s operating profits after-tax of €671 million produced an operating margin after-tax of 10. 55% (€671 carve up by €6,359 in sales), the highest in the industry in 2004. The second component of ROIC, the capital turnover ratio (sales divided by invested capital)†velocityâ€reflected Porsche’s manufacturing and assembly strat egy.By leveraging the Valmet and VW confederations in the figure of speech, production, and assembly of both the Boxster (with Valmet of Finland) and the Cayenne (with Volkswagen of Germany), Porsche had achieved capital turnover ratios which dwarfed those achieved by any other European automaker. Porsche’s capital turnover ratio had surpassed all other European automakers consistently over the past decade. As illustrated by Exhibit 5, Porsche’s growing margins and relatively high velocity had keep up a very impressive ROIC for many years. In recent years, however, invested capital had risen faster than sales.But Porsche was not adding fixed assets to its invested capital basis, but coin. The rising bullion chemical equilibriums were the result of retained profits (undistributed to shareholders) and new debt issuances (raising more than 600 million in 2004 alone). As a result, fiscal 2003/04 had proven to be one of Porsche’s poorest years in ROIC. Exhibit 5 2. 5 Porsche’s pep pill, Margin, and ROIC Margin ; angstrom; ROIC 20% Velocity = Sales/Invested Capital 2. 15 2. 0 2. 12 Velocity 1. 97 1. 99 1. 81 18% 1. 91 ROIC (Operating Margin X Velocity) 14. 2% 12. 5% 11. 7% 11. 6% 10. 5% 1. 19 10. 5% 1. 21 9. % 11. 6% 13. 8% 16% 12. 9% 1. 5 14% 12. 6% 11. 9% 12% 10% 1. 0 8. 0% 6. 1% Operating Margin 6. 4% 6. 0% 6. 4% 8% 0. 91 0. 84 6% 0. 5 3. 8% 2. 0% 3. 7% 4% 2% 0. 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 0% Operating margin = ( EBIT †Taxes ) / Sales. Invested capital = hard currency + net works capital + net fixed assets. Porsche’s minimal levels of invested capital resulted from some rather unique characteristics. Invested capital is defined a number of ways, but Vesi used her employer’s standardized definition of property gain net working capital plus net fixed assets. As illustrated in Exhibit 6, Porsche’s invested capital base TB0067 7 had been growing rapidly in recent years, but not be cause of surplus fixed asset investments. Porsche’s invested capital was growing primarily because of its accumulation of cash. 8 Vesi was provoke that using this measure of â€Å"invested capital” led to a distorted view of the company’s actual performance. Porsche’s minimal fixed-asset capital base resulted from the distinct strategy of the company as executed over the past decade.The development and manufacturing and assembly of the Cayenne was a clear ex adenylic acidle: • Porsche had spent only $420 million in the development of the Cayenne. Auto analysts estimated that any other major automaker would have spent between $1. 2 and $1. 8 billion. • Porsche had effectively avoided these cost and investments by co-producing the Cayenne with Volkswagen. The Cayenne shared some 65% of its parts and modules with the VW Touareg, with only 13% of the Cayenne’s actual wholesale value being derived from parts developed and manufactured by Porsche itself. The production agreement between Porsche and VW made VW responsible for all cost associated with quality problems arising at VW’s manufacturing facilities. Porsche paid VW a unit price for each Cayenne eubstance produced in VW’s assembly facility in Bratislava, Slovakia. Porsche had successfully off-loaded both cost and risk. Exhibit 6 Asset Structure Cash Net working capital Net fixed assets Invested capital indebtedness Structure Short-term debt Long-term debt Total debt blondness Invested capital Porsche’s Managerial Balance canvas tent (millions of euros) 996 € 227 38 487 € 753 1997 € 281 116 578 € 975 1998 € 466 132 590 € 1,188 1999 € 730 225 649 € 1,604 2000 € 823 258 755 € 1,835 2001 € 1,121 369 960 € 2,449 2002 € 1,683 (355) 2,746 € 4,073 2003 € 1,766 (382) 3,215 € 4,599 2004 € 2,791 403 3,797 € 6,992 2005 € 4,325 (131) 3, 641 € 7,834 €8 19 € 27 726 € 753 €7 124 € 131 844 € 975 € 10 114 € 124 1,064 € 1,188 € 52 107 € 159 1,445 € 1,604 € 20 82 € 102 1,733 € 1,835 € 158 (49) € 108 2,341 € 2,449 € 137 850 € 987 3,086 € 4,073 € 70 859 € 929 3,670 € 4,599 € 649 1,641 € 2,290 4,702 € 6,992 € 1,107 2,026 € 3,133 4,701 € 7,834Net working capital = accounts receivable, inventories, and prepaid expenses, less accounts payable and accured expenses. This assumes ‘provisions for risk and charges as equity. Porsche Changes Tack The pass and fall of 2005 saw a series of move moves by Porsche. First, Porsche announced that the €1 billion investment to design and manufacture the new Panamera would be largely funded by the company itself. Although the introduction of the Panamera had been anticipated for quite some time, the market was surprised that Porsche intended to design and build the carâ€and its manufacturing facilityâ€nearly all in all in-house.The new sports coupe was to be produced in Leipzig, Germany, at the lively Porsche facility, although a substantial expansion of the plant would be required. As opposed to the previous new product introductions, the Boxster and the Cayenne, there would be no major production partner involved. Porsche CEO Wendelin Wiedeking specifically noted this in his press release: â€Å"There are no plans for a centert venture with another car maker. But to ensure the profitability of this new model series, we will cooperate more closely than so far with selected system suppliers. 9 The German share of the value of the Panamera would be roughly 70%. uniform the 911, Boxster, and Cayenne, the Panamera would bear the Made in Germany stamp. This methodology defines invested capital by assets, the left-hand side of the managerial balance sheet. Alternative definitions of invested capital focus on the right-hand(a) side of the balance sheet; for example, as stockholder equity plus interest-bearing debt. Either version can also be netted for cash holdings under different methods. 8 Porsche’s cash and marketable securities grew from €2. billion in 2004 to over €4. 3 billion at the end of 2005 (July 31, 2005). Credit Suisse First Boston had in fact noted on September 21, 2005, just days before the VW proclamation, that, â€Å"In our view, the only disappointment is that management indicated that the company would not look into returning cash to shareholders in the abutting 18 months. ” 9 â€Å"Go Ahead for Porsche’s Fourth Model Series,” Porsche Press forfeit, July 27, 2005. 7 8 TB0067 The second surprise occurred on September 25, 2005, with the announcement to invest €3 billion in VW.Porsche AG, Stuttgart, seeks to make a share of approximately 20 percent in the stock capital of Volkswag en AG, Wolfsburg, entitled to vote. Porsche is taking this decision because Volkswagen is now not only an important development partner for Porsche, but also a significant supplier of approximately 30 percent of Porsche’s sales volume. In the words of Porsche’s President and CEO: â€Å"Making this investment, we seek to good our business relations with Volkswagen and make a significant contribution to our own future plans on a lasting, long-term basis. Porsche is in a frame to pay the erudition of the planned share in Volkswagen through its own, existing liquidity. After careful examination of this business case, Porsche is confident that the investment will prove profitable for both parties. … The planned acquisition is to ensure that… there will not be a unlike takeover of Volkswagen by investors not committed to Volkswagen’s long-term interests. In the words of Porsche’s President and CEO: â€Å"Our planned investment is the strate gical consequence to this risk.We wish in this way to ensure the independence of the Volkswagen Group in our own interest. This ‘German outcome’ we are want is an essential prerequisite for still development of the Volkswagen Group and, accordingly, for continuing our cooperation in the interest of both Companies. ” â€Å"Acquisition of Stock to Secure Porsche’s Business,” Porsche AG (press release), September 25, 2005. Porsche would spend approximately €3 billion to take a 20% ownership position in VW. This would make Porsche VW’s single largest investor, slightly larger than the government of Lower comte de Saxe. 0 It clearly eliminated any possible hostile acquisitions which whitethorn have been on the horizon (DaimlerChrysler was rumored to have been interested in raiding VW. ) The announcement was met by near-universal adversary The family linkages between the two companies were well known. Ferdinand K. Piech, one of the most prominent members of the Piech family which, along with the Porsche family, controlled Porsche, was the former CEO (he retired in 2002) and still Chairman of Volkswagen. He was the grandson of Ferdinand Porsche, the founder of Porsche.Accusations of betrothal of interest were immediate, as were calls for his resignation, and the denial of Porsche’s involve for a seat on VW’s board. Although VW officially welcomed the investment by Porsche, Christian Wulff, VW’s board member representing the state of Lower Saxony where VW was headquartered, publicly opposed the investment by Porsche. In the look of many, the move by Porsche was a return to German corporate cronyism. For years, â€Å"Deutschland AG” was emblematic of the cosy lucre of cross-shareholdings and shared non-executive directorships that insulated Germany from international capitalism.Wendelin Wiedeking, Porsche’s chief executive, himself invoked the national angle, saying this: †Å"German solution was essential to furbish up VW, Europe’s largest carmaker, against a possible hostile takeover by short-term investors. ” â€Å"Shield for embodied Germany or a Family Affair? VW and Porsche Close Ranks,” Financial Times, Tuesday, September 27, 2005, p. 17. Germany, although long known for complex networks of cross-shareholdings, had effectively unwound most of these in the 1990s.The German government had successfully accelerated the unwinding by making most cross-shareholding liquidations untaxed in recent years, and both the financial and nonfinancial sectors had sold literally billions of euros in shares. This move by Porsche and VW was seen as more of a personal let onâ€Ferdinand Piechâ€rather than a national issue of German alliances. Many Porsche investors had agreed, arguing that if they had wanted to invest in VW, they would have done it themselves. The resulting ownership structure of Volkswagen in October 2005 was: 18. 3% Pors che; 18. 2% State of Lower Saxony; 13. 0% Volkswagen; 8. 58% Brandes Investment Partners; 3. 5% Capital Group; and 38. 19% widely distributed. Porsche still feature the option to purchase another 3. 4%. 10 TB0067 9 There were also potential strategic conflicts between the two companies. Volkswagen’s premium segment company, Audi, was a distinct competitor to Porsche, particularly in light of the new Panamera project. VW itself had fallen on corky times (see Exhibit 3), and many VW watchers believed that the company needed activist shareholders.VW and its Audi unit were both suffering from high wage costs in German factories, and VW had been seeking wage concessions from many of its unions to regain competitiveness and profitability. Porsche had a reputation of being soft on German unions, and with the growing presence of both Porsche and Ferdinand Piech, critics feared VW would back away from its wage-reduction push. Porsche was not expected to be as cost-conscious or to pu sh VW to make drastic strategic changes.Instead, Porsche was expected to push VW to underwrite a number of the new models and platforms Porsche was in the process of introducing. There were, in fact, remain allegations that a number of VW’s new product introductions had been delayed by the Cayenne’s production in 2003 and 2004. Shareholders in Porscheâ€the nonfamily-member shareholdersâ€were both surprised and mixed-up by this dramatic turn of events. Although the arguments for solidifying and securing the Porsche/ VW partnership were rational, the cost was not.At €3 billion, this was seemingly an enormous investment in a nonperforming asset. Analysts concluded that the potential returns to shareholders, even in the form of a special dividend, were now postponed indefinitely; shareholders would not â€Å"see the money” for years to come. The move was also seen by some as an acknowledgment by Porsche that it could no longer expand into new product c ategories without significantly larger capital and technical resources. Automotive electrical systems, for example, were increasingly complex and beyond capabilities possessed in-house by Porsche.The interest in VW, Europe’s second largest automaker to DaimlerChrysler, would sure as shooting provide the company with access to key resources. But why weren’t these resources accessible through partnerships and alliances, without the acquisition of one-fifth ownership in Europe’s largest moneyloser? The announcement of Porsche’s intention to take a 20% equity interest in Volkswagen in September 2005 was greeted with outright opposition on the part of many shareholders in both Volkswagen and Porsche. Major investment banks like Deutsche Bank immediately downgraded Porsche from a procure to a handle, arguing that the returns on the massive investment, ome €3 billion, would likely never accrue to shareholders. 11 Although Porsche and VW were shortly co- producing the Porsche Cayenne and Volkswagen Touareg, this ownership interest would take the two companies far down a path of cooperation way beyond the manufacture of a sport utility vehicle. Although Porsche had explained its investment decision to be one which would keep in line the stability of its future cooperation with VW, many critics saw it as a choice of preserving the stakes of the Porsche and Piech families at the expense of nonfamily shareholders.The question remained as to whether this was indeed a good or bad investment by Porsche, and good or bad for whom? Vesi wondered if her position on Porsche susceptibility have to, in the end, distinguish between the company’s ability to generate results for stockholders versus its willingness to do so. wherefore should a small and highly profitable maker of sports cars suddenly hitch its fortunes to a lumbering and essay mass-producer? That was the question that some alarmed shareholders asked this week when Porsche, the reality’s most profitable carmaker, announced plans to buy 20% stake in Volkswagen (VW), Europe’s biggest carmaker.To some critics of the deal, Porsche’s move looked like a return to cosy, German corporatism at its worst. Since January 2002, when a change in the law encouraged German companies to sell their cross-shareholdings in each other, free of capital gains tax, new foreign shareholders have often shaken up fossilised German management. A deal with hail-fellow compatriots from Porsche might rescue VW from this distasteful fate, particularly since foreign hedge funds and corporate raiders have been rumored to be circling VW. â€Å"Business: Keeping It in the Family,” The Economist, October 1, 2005. 1 â€Å"Porsche: We may never see the cash; downgrade to sell,” Deutsche Bank, September 26, 2005. TB0067 10 vermiform appendix 1 (Millions of euros) Sales greet of goods sold Gross profits Porsche’s Statement of Income, 1996-2005 (p eriod ending July 31) 1996 € 1,438 1,177 € 261 243 15 64 € 97 6. 8% 68 € 29 2. 0% 3 € 26 1 0 € 25 1. 7% —-1997 € 2,093 1,648 € 446 339 21 67 € 195 9. 3% 108 € 87 4. 2% 7 € 81 9 1 € 70 3. 4% 45. 6% 40. 0% 1998 € 2,519 1,853 € 667 439 17 88 € 334 13. 2% 157 € 176 7. 0% 13 € 164 22 € 142 5. 6% 20. 4% 12. 4% 1999 € 3,161 2,154 € 1,007 571 29 84 € 550 17. % 184 € 366 11. 6% 12 € 354 164 € 191 6. 0% 25. 5% 16. 3% 2000 € 3,648 2,527 € 1,121 625 26 114 € 636 17. 4% 197 € 439 12. 0% 12 € 427 220 € 207 5. 7% 15. 4% 17. 3% 2001 € 4,441 3,062 € 1,380 793 61 87 € 735 16. 5% 133 € 602 13. 6% 14 € 588 318 € 270 6. 1% 21. 8% 21. 2% 2002 € 4,857 2,981 € 1,877 914 79 one hundred ten € 1,152 23. 7% 279 € 873 18. 0% 48 € 825 363 (0) € 462 9. 5% 9. 4 % -2. 6% 2003 € 5,582 3,250 € 2,332 1,187 116 147 € 1,409 25. 2% 392 € 1,017 18. 2% 88 € 928 363 0 € 565 10. 1% 14. 9% 9. 0% 2004 € 6,359 3,787 € 2,572 1,254 99 248 € 1,665 26. % 525 € 1,141 17. 9% 58 € 1,082 470 (4) € 616 9. 7% 13. 9% 16. 5% 2005 € 6,574 3,501 € 3,073 1,539 172 169 € 1,875 28. 5% 510 € 1,365 20. 8% 127 € 1,238 459 (4) € 783 11. 9% 3. 4% -7. 6% Selling, public & admin expenses Non-operating income other income/expense, net EBITDA EBITDA/sales Depreciation & amortization Earnings before interest and tax EBIT/sales invade expense on debt Earnings before taxes (EBT) Income taxes nonage interest Net income availabe to common Net income/sales (ROS) Sales growth Earnings growthSource: Thomson Analytics, June 2006, and author calculations. Appendix 2 (Millions of euros) Assets Cash ;amp; equivalents Receivables, net Inventories prepay expenses Tot al current assets Porsche’s Balance Sheet, 1996-2005 (period ending July 31) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 € 227 91 199 23 € 540 €0 60 € 1,324 917 € 407 21 € 1,027 € 281 170 297 47 € 795 € 12 5 € 1,536 994 € 541 20 € 1,374 € 466 196 328 37 € 1,027 € 10 5 € 1,623 1,062 € 561 14 € 1,617 730 202 357 42 € 1,332 € 30 9 € 1,683 1,183 € 501 110 € 1,981 € 823 321 396 45 € 1,585 € 177 14 € 1,797 1,310 € 487 76 € 2,340 € 1,121 439 468 29 € 2,056 € 253 38 € 1,960 1,399 € 561 108 € 3,016 € 1,683 638 487 50 € 2,858 € 539 39 € 3,607 1,652 € 1,955 214 € 5,604 € 1,766 823 539 42 € 3,170 € 552 42 € 4,122 1,847 € 2,276 346 € 6,385 € 2,791 939 726 23 € 4,479 € 733 21 € 4,724 2,116 € 2,607 436 € 8,276 € 4,325 971 572 17 € 5,885 € 1,211 27 € 4,486 2,378 € 2,108 295 € 9,525Long term receivables Investments in unconsol subsidiaries Property, plant ;amp; equipment, gross Accumulated depreciation Property, plant ;amp; equipment, net Other assets Total Assets Liabilities Accounts payable ST debt ;amp; current portion due LT debt Income taxes payable Other current liabilities Current liabilities, total Long term debt Provision for risks ;amp; charges Deferred taxes Other liabilities Total liabilities Shareholders virtue Non-equity reserves & minority interest Common Equity Shareholders equity, total Total liabilities ;amp; shareholders equity Common shares outstanding (millions) 117 8 3 156 € 283 € 17 481 1 1 € 782 € 148 7 10 241 € 406 € 116 541 4 4 € 1,071 € 159 10 8 262 € 439 € 114 648 n/a 0 € 1,202 € 193 52 10 174 € 429 ↚¬ 102 856 n/a 5 € 1,392 € 240 20 17 248 € 525 € 102 951 (22) 2 € 1,558 € 236 158 28 303 € 725 €0 1,312 (52) 2 € 1,987 € 305 137 200 1,027 € 1,668 € 317 1,619 97 437 € 4,138 € 337 70 71 1,378 € 1,856 € 337 1,916 173 350 € 4,631 € 368 649 61 855 € 1,933 € 1,457 2,378 182 2 € 5,953 € 440 1,107 187 1,064 € 2,798 € 1,985 1,281 36 5 € 6,105 € 10 235 € 245 € 1,027 17. €5 298 € 303 € 1,374 17. 5 €0 416 € 416 € 1,617 17. 5 €2 587 € 589 € 1,981 17. 5 €0 782 € 782 € 2,340 17. 5 €0 1,028 € 1,028 € 3,016 17. 5 €1 1,466 € 1,467 € 5,604 17. 5 (€ 0) 1,755 € 1,755 € 6,385 17. 5 €6 2,317 € 2,323 € 8,276 17. 5 €8 3,412 € 3,420 € 9,525 17. 5 Source: Thomson Analytics, June 200 6, and author calculations. TB0067 11 Appendix 3 (Millions of euros) Porsche’s Statement of Cash Flow, 1996-2005 (period ending July 31) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Operating Activities Income before extraordinary items Depreciation & amortization Other Cash Flow Funds From/For Other Operating Activities Net Cash Flow From Operating Activities spend Activities Capital Expenditures Additions To Other Assets Increase In Investments establishment of Fixed Assets Net Cash Flow From place Activities financing Activities Net Proceeds From Sales/ subject of Com/Prf Stock Com/Prf Purchased,Retired,Converted,Redeemed Long Term Borrowings Inc(Dec) In ST Borrowings lessening In Long Term Debt Cash Dividends paying(a) †Total Net Cash Flow From Financing Activities Exchange Rate Effect Cash & Cash Equivalents †Inc(Dec) € 25 74 47 26 € 171 € 71 127 (0) 22 € 220 € 142 157 (7) 72 € 363 € 191 184 23 (5) € 392 € 210 197 11 (22) € 396 € 270 133 16 151 € 570 € 462 279 26 611 € 1,377 € 565 392 423 77 € 1,456 € 612 525 515 (349) € 1,303 € 779 510 42 (157) € 1,175 (€ 184) (15) (14) (€ 214) (€ 230) n/a n/a (€ 230) (€ 174) (2) (0) 10 (€ 166) (€ 145) (12) (7) 27 (€ 136) (€ 257) n/a n/a 8 (€ 249) (€ 306) n/a (1) 23 (€ 285) (€ 1,833) 831 (€ 1,002) (€ 1,338) n/a 309 (€ 1,028) (€ 1,265) n/a 478 (€ 787) (€ 851) (63) (243) 226 (€ 932) €0 6 1 €8 (30) €0 102 (33) (5) € 64 54 €0 (13) (€ 13) 185 €0 49 (21) (22) €6 1 263 €0 (36) (22) (€ 58) 4 93 €0 37 (26) € 11 2 298 0 339 (102) (45) € 192 (5) 562 €0 (39) (297) (€ 336) (8) 84 €0 639 n/a (0) (59) € 580 5 1,025 €6 147 (69) € 84 (32) 296 Source : Thomson Analytics, November 2005, and author calculations. Appendix 4 Porsche Dispenses with Listing in New York Stuttgart. The preferred stock of Dr. Ing. h. c. F. Porsche AG, Stuttgart, will continue to be listed exclusively on German stock exchanges. All considerations about gaining an additional listing in the U. S. A. have been laid digression by the Porsche Board of Management. The sports car manufacturer had been invited to join the New York Stock Exchange at the beginning of the year. The Chairman of the Board of Management at Porsche, Dr.Wendelin Wiedeking explained the decision: â€Å"The idea was certainly attractive for us. But we came to the finishing that a listing in New York would merely have brought any benefits for us and our shareholders and, on the other hand, would have led to considerable extra costs for the company. ” The crucial factor in Porsche’s decision was ultimately the law passed by the U. S. government this summer (the â€Å"Sarban es-Oxley Act”), whereby the CEO and the theater director of Finance of a public limited company listed on a stock exchange in the U. S. A. have to verify that every balance sheet is correct and, in the case of incorrect specifications, are personally reasonable for high financial penalties and even up to 20 years in prison.In Porsche’s view, this new American ruling does not match the legal position in Germany. In Germany, the annual financial command is passed by the entire Board of Management and is then presented to the Supervisory Board, after being audited and certified by chartered accountants. The chartered accountants are commissioned by the general meeting of shareholders and they are obliged both to report and to submit the annual financial debate to the Supervisory Board. The annual financial statement is only passed after it is approved by the Supervisory Board. hence there is an overall responsibility covering several(prenominal) different committees and, as a rule, involving over 20 persons, including the chartered accountants.The Porsche Director of Finance, Holger P. Harter, made the following comments: â€Å" instantly in Germany, the deliberate falsification of balance sheets is already punished according to the relevant regulations in the Commercial Code (HGB) and the Company Act (Aktiengesetz). Any special treatment of the Chairman of the Board of Management of the Director of Finance would be illogical because of the intricate network within the decision-making process; it would also be conflicting with current German law. ” Source: Porsche, News Release of October 16, 2002. 12 TB0067 Appendix 5 Porsche’s Share Price, 2004-2006 Source: www. porsche. com. TB0067 13\r\n'