Porsche Case Study

Case Facts

Porsche AG (“Company” or “Porsche”) is a publicly listed German automobile manufacturer specializing in high-performance sports cars, SUVs and sedans. The company is primarily owned by two families - the Porsche and Piëch, whose classes of shares still remain to possess all voting rights.

Ever since Dr. Wendelin Wiedeking’s appointment as President/CEO of Porsche, the Company has reported stellar financials results that had succeeded in creating substantial shareholder value for more than a decade. In fact, the fiscal year ending July 2005 recorded 6.7 billion euros in sales and 721 million euros in profit after-tax. The company was also successful in expanding its business line and subsequently reduce its reliance on an overly cyclical luxury sports car market.

In terms of strategy, Porsche maintains a very lean product line with only three (3) models being sold to the market during this time. It should be noted that only one model is solely produced and assembled by the Company as the other two are co-manufactured with other institutions. This strategic combination of licensing, out-sourcing, and in-sourcing to leverage other people’s money ensued to industry-leading return on invested capital (ROIC) for the Company, which in turn maximize shareholder value.

However, with the announcements on increasing manufacturing costs (i.e., plans to largely fund the production of Panamera) and the looming “costly” acquisition of a 20% ownership stake in VW, most players in the market feel that Porsche is regressing to stakeholder capitalism.

Problem Statement and Objectives

This case takes the point of view of Veselina Dinova as she seeks to clarify Porsche’s value proposition, a relevant factor on the recommendation she will provide to her firm’s Investment Committee. In particular, the fundamental question that needs to be answered is – “Given the Company’s current structure, financials and recent business pronouncements, whose objectives are being prioritized and pursued: the shareholders or the controlling families?”

The resolution of this conundrum leads to the attainment of the following objectives:

• To identify the relevant factors that may allude to a company’s value proposition
• To determine whether Porsche is pursuing shareholder wealth maximization or stakeholder capitalism
• To determine the appropriate recommendation to present in the Investment Committee meeting

Assumptions

Our analysis considers all relevant financial and non-financial facets of the Company that is provided in the case.

Analysis

Non-Financial

Corporate Governance Structure. A company fully controlled only by two families promotes stakeholder capitalism. In contrast, the pursuit of shareholder objectives can better thrive in an environment where other investors are also provided the necessary voice in business decisions as compared to only a handful calling the shots. The willingness to generate shareholder wealth is also put into question given Porsche’s remuneration policies. To wit, Porsche rewards management on business financial performance – the numbers found on the three major financial statements – and not on the market’s opinion of the company’s value (share price).

Business strategies. The Company’s decision to take a 20% stake in VW was met with near-universal opposition due to the agreed upon purchase price. There were also underlying problems with the deal especially in terms of conflicts of interest and differences in policies (e.g., wage setting) between the two companies. Furthermore, one can infer that Porsche is taking steps to fully acquire VW in the near future. This begs the question on the real motivation for this acquisition, e.g., long-term performance and profitability much like a family-owned business.

Financial

We examine the critical formula in measuring shareholder value which is the Return on Invested Capital (ROIC). ROIC is composed of operating margin and velocity.

Operating Margin is exceptional for Porsche over the years because of the premium placed on its brand and quality of cars. This enabled the company to price its cars expensively relative to the other car manufacturers. In fact, operating margin is 11% in 2004 and the highest among the industry. VW only posted a meager 1.39% margin. Porsche’s ability to maintain a high operating margin is embedded on the strategy to maintain a selective product portfolio.