Dr
Ferdinand Piëch’s reign at Volkswagen has been – all things considered –
rather a mixed bag. The much-lauded policy of platform sharing across a multitude
of brands has failed to assuage concerns over Volkswagen’s structural problems
and poor financial performance. Now, speculation is increasing that Volkswagen
AG is considering a range of moves to protect its independence, including spinning
off Audi. Moves by the European Commission to address Germany’s protective ‘Volkswagen
Law’ and a perception that VW’s share price is low have increased rumours of interest.
David Leggett considers the issues.
Could Volkswagen really be a takeover target? It would certainly be ironic
were that to be so. Under Dr Piëch, Volkswagen has been a voracious buyer
of automotive brands. The Volkswagen group stable includes the mainstream Seat
and Skoda and the premium Audi brand, as well as the more exotic Bentley, Rolls
Royce (until 2003 when it transfers to BMW) and Bugatti. And last year, VW took
a 16% stake in Swedish heavy truck maker Scania. Signs of over-reaching ambition?
Some would say that greater concentration on problems closer to home would be
desirable.
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Volkswagen the ‘poor performer’
Hand-in-hand with the expansion of the Volkswagen brand portfolio, Dr Piëch
developed a platform sharing industrial policy that was designed to yield big
savings to manufacturing costs. When he took over in 1993, Volkswagen was building
cars on 16 platforms – today that has been whittled down to 4. But the proliferation
of models on each platform has generated additional costs, particularly in marketing,
and the anticipated cost savings through the strategy have largely failed to
materialise. Cannibalisation of volume between brands is also a worry, especially
as each brand has tended to have its own product on each generic platform as
a matter of course. The percentage of profit on revenues has stubbornly lagged
behind Volkswagen’s main competitors. According to Goldman Sachs, VW’s ‘Return
on Capital Employed’ is just over 3%. That compares with 8-9% for Renault and
PSA, 10% for Ford, almost 10% for BMW and around 15% for Porsche.
Brand modules not common platforms please
Dr Piëch has recently signalled a change in Volkswagen’s industrial strategy
away from common components sets and platforms underpinning models across the
group’s brands and towards brand-specific modules. It is a quite radical departure
and seems almost a belated recognition that common platforms were not the best
way to drive industrial policy.
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By GlobalDataAnd lately concerns have increased that in some areas the company is failing
to make steady progress and that structural problems persist. In particular,
there are worries that Volkswagen has been slow to shift production out of its
high cost base in Lower Saxony. Around half of Volkswagen’s 300,000 workforce
is located in Germany. And with the state of Lower Saxony’s status as the largest
shareholder (at just under 20%) there is a strong suspicion that seriously getting
to grips with the cost-base is simply not on the agenda. Indeed, the state has
been a largely passive investor and has seemed more concerned with preserving
jobs than with traditional shareholder concerns like profits.
Lower Saxony ‘shield’ under threat?
Moves by the European Commission to address Germany’s protective ‘Volkswagen
Law’ and a perception that VW’s share price is low for a company of its size,
have increased rumours of possible acquisition interest. Germany’s so-called
‘Volkswagen Law’, enacted especially for the company, has limited any investor
from holding more than 20% of VW’s voting rights. This has prevented the company
from being a takeover target in the past. The rule gives an effective right
of veto over any takeover bid to the Lower Saxony state government. Analysts
say abolition of the statutes would rekindle the merger speculation which surfaces
periodically around VW and is regularly dashed by Lower Saxony’s insistence
that it would block any hostile move.
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But the law has come under threat from EU competition officials who oppose
legal provisions that hinder takeovers. The European Commission, the executive
body of the European Union, said earlier this month that it is studying whether
to obligate Germany to rescind the measure protecting Volkswagen. The law is
being examined on the grounds that it could be said to interfere with the free
movement of capital under European Union rules, although the EC has not yet
launched a formal investigation.
VW, which has a market capitalisation of about 24 billion euros, is dwarfed
by its Stuttgart rival DaimlerChrysler, with a market value of almost 58 billion
euros, making it potentially vulnerable to a bid if the ‘Lower Saxony shield’
were removed. Even luxury car maker BMW has a bigger market capitalisation,
with about 27 billion euros, despite having only a fraction of VW’s sales volumes.
Protective measures being considered by Volkswagen
Volkswagen is now said to be considering a range of measures to help ensure
it remains independent, including the possible spin-off of its premium Audi
brand. A spin-off could be an effective defence strategy as it may boost the
group’s ‘sum-of-the parts’valuation. Also, spinning off Audi would bring a cash
windfall. The Audi shares that VW retained would be valued much higher on the
open market than they are currently as part of the group. It is understood that
VW would be interested in retaining a controlling stake of Audi in the event
of a spinoff.
But Audi, which accounts for nearly a quarter of VW’s revenue and operating
profit, would be a key asset for anyone interested in the VW group as a whole,
as well as an attractive asset in its own right. An Audi spinoff is something
that could be used as a poison pill in the event of an attack. The threat of
it could act as deterrent.
The premium Audi brand made more than 650,000 of VW’s 5.2 million cars last
year. While VW’s other brands fight in the highly competitive market for high-volume
cars, Audi has been able to enjoy higher profit margins.
Separate listings for VW Group units could be coming, in spite of official
company denials. It could be in the interests of those seeking to see a higher
valuation on the group as a whole.
Another protective option for VW might be a cooperation alliance with a friendly
company that could involve a share swap.
The company is also involved in a shares ‘buy-back’. VW said in March it would
ask shareholders this June to authorise the board to buy 10 percent of its shares.
The company already bought back around 10 percent of its shares last autumn.
The move to buy back more shares was seen by analysts as a sign that VW is either
gearing up to make an acquisition, possibly in the truck sector, or else seeking
to boost shareholder value. It could do this by cancelling the shares and thereby
raising earnings per share – a defensive move against a takeover bid.
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"Before I leave, I see this as my task to see to it that with or without
the statutes, no one can swallow our group without choking on it," Piech
was recently quoted by WirtschaftsWoche.
Ford in the frame for VW?
Some industry observers say Ford Motor Co might be interested in a tie-up with
Volkswagen. Ford has a market value in excess of 50 billion euros, compared
to Volkswagen’s 24 billion euros. A takeover of VW would be a major boost to
Ford’s presence in the European market, where the US giant has struggled in
recent years. The big question would have to be: how would Ford management add
value and make VW more profitable? One obvious area would be cutting costs in
Germany, but that could be filled with practical difficulties. The last thing
a new owner would want would be a labour relations nightmare.
One thing’s for sure. The talk of Volkswagen’s defensive strategy and its ‘under-valuation’
will be helping to firm up the share price. That has been happening. Dr Piëch,
who is scheduled to retire in spring 2002, has made improving his company’s
share price a high priority. The company’s relatively poor financial performance
and low valuation point to long-term structural weaknesses that he has presided
over. In spite of the group’s undoubted progress since 1993, the lack of progress
in these areas will rankle with some shareholders. But the last thing that Dr
Piëch would want would be to be held responsible or remembered for creating
the conditions for a hostile takeover.
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