Porsche Takes Over VW, May Invade US (GM)(F)

After years of speculation, Porsche has become the controlling shareholder in VW. The news seems counterintuitive because VW is by far the larger company, but Porsche’s ownership dates back years to when it took an interest in VW’s shares.

The change in control may well mean a change in philosophical direction. Among other things,VW has been a failure in the US market since the demise of the Bug, its once popular small car with a tiny engine in the trunk.

According to The New York Times, "Porsche now has voting control of VW’s shares and has said it intends to raise its stake to more than 50 percent in the next few months." The performance car company is going to want something in exchange for its burgeoning investment.

VW already does well in the fast-growing China market where it leads in share, just ahead of GM. The trouble is that vehicle sales dropped on the mainland in August. Yesterday, GM revised its sales goals for the world’s most populous country downward.

While the US auto market is in ruins now, it still produces 14 million vehicle sales a year. There is too much competition in America for any company to begin with next to no market share and grow that to 10% or 15%. That must pain VW, which is the largest car company in Europe.

The speculation that Chrysler may fail grows each month as its sales run down more than 30% compared with last year. No matter what it says in public, hedge fund Cerberus would almost certainly like to dump its interest.

If Ford (F) and GM (GM) do not get $50 billion in loan guarantees from the US government, they will face raising capital during a global credit crisis. Since both have market caps below $12 billion, raising $20 billion would destroy the value of their common stocks. At Ford, where the founding family’s fortune is based on the company’s existence, the process of a dilution or a liquidation would be especially grim.The Ford family still controls the firm with special voting shares and might part with the company to save its inheritance

VW has a chance to buy its way into the US market, and with a more aggressive owner in Porsche, that prospect is more likely. VW could certainly eliminate all of the management and most of the product development costs at a US car company. A sharp cutting of expenses might even turning a money-losing American car company into a profitable enterprise.

VW can get into the world’s largest car market cheap. One of the US auto companies will not be independent for long.

Douglas A. McIntyre