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³Yes, of course we have heard of shareholder value. But that does not change the fact that we put customers first, then workers, then business partners, suppliers and dealers, and then shareholders.´
Dr. Wendelin Wiedeking, CEO, Porsche
Will Porsche¶s new strategy actually create shareholder value?
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
2005 Porsche is a publicly traded family controlled company Porsche is a relatively simple company by product line. one of the worst performing automakers in the world Copyright © 2009 Pearson Prentice Hall. 1-2 . Porsche has enjoyed an industry leading return on invested capital (ROIC) But two major announcements in the summer and fall of 2005 seemingly indicate that Porsche is changing directions: The Panamera will be manufactured in-house. All rights reserved. and in-sourcing to leverage other people¶s money As a result of its strategy. out-sourcing. with Porsche¶s own money Porsche has invested 3 billion in taking a 20% interest in Volkswagen (Germany). having three existing and one newly proposed products: 911 ± the only model produced and assembled completely by Porsche Boxster ± licensed manufacturing with Valmet of Finland Cayenne ± co-manufactured with Volkswagen of Germany Panamera ± to be completely Porsche (at least that¶s the plan) Porsche¶s profitability has been extremely impressive over the past decade ± particularly for an automaker Porsche has followed a strategy with both the Boxster and the Cayenne which uses a combination of licensing.An Overview of Porsche AG.
Is pursuing the interests of Porsche¶s controlling families different from maximizing the returns to its public share owners? Copyright © 2009 Pearson Prentice Hall. All rights reserved.Porsche Changes Tack: Case Questions 1. What strategic decisions made by Porsche over recent years had given rise to its extremely high return on invested capital? 2. Vesi wondered if her position on Porsche might have to distinguish between the company¶s ability to generate results for stockholders versus its willingness to do so. 1-3 . What do you think? 3.
Exhibit 1 Porsche¶s Growth in Sales. 1-4 . Profits and Margin Copyright © 2009 Pearson Prentice Hall. All rights reserved.
000 50.000 40.000 70. 1-5 .000 10. Units 80. These models totaled 1005 in 1995 and 104 in 1006.000 30.000 20.000 0 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 911 Boxster Cayenne Note: Excludes sales of the discontinued 928 and 944/968 models in 1994-1996. All rights reserved. Copyright © 2009 Pearson Prentice Hall.Porsche¶s Expanding Platforms and Growing Sales The Cayenne was the single most successful new automobile launch in history.000 60.
and does not want to add to the short-term thinking common among equity investors in today¶s equity markets Copyright © 2009 Pearson Prentice Hall. community ± rather than focus solely on stockholders Porsche¶s focus may be one of self-interest Porsche has frequently been accused of operating the company for the primary benefit of the Porsche and Piëch families. have moved to international standards It has continued to report only semi-annually. profits. suppliers. management. rather than the increasingly common focus on stockholder wealth maximization common in the Anglo-American markets Stakeholder wealth maximization attempts to balance in theory the needs and returns to the multitude of corporate stakeholders ± stockholders. customers. over all other stakeholder groups Rewards management in the company primarily on the basis of sales. margins. not quarterly. employees.Corporate Governance at Porsche Porsche¶s focus is on stakeholder wealth It has followed what is generically referred to as stakeholder wealth maximization over its history. and other financial measures of corporate performance rather than stock or stock options based on market performance Porsche has continued to fight industry standards for reporting and disclosure It has continued to report according to German accounting standards long after most other German companies. arguing that it does not see its business quarterly. 1-6 . publicly traded companies. creditors. and management. All rights reserved.
the greater the return on invested capital. 1-7 . Velocity itself will change only with changes in corporate strategy ± including licensing and out-sourcing at Porsche. ROIC = Operating Profits After-tax Sales Sales X Invested Capital Operating Margin Velocity In both cases. Traditionally. bigger is better. or the growing influence of in-sourcing in other industries. All rights reserved. The larger the operating margin and the greater the velocity. Copyright © 2009 Pearson Prentice Hall. termed operating margin and velocity. most companies focus on the operating margin. often concluding they have little capability to alter their basic velocity value.Managing to Metrics: ROIC Return on invested capital is composed of two components calculated from the firm¶s income statement and balance sheet.
All rights reserved. 1-8 . 2004 Copyright © 2009 Pearson Prentice Hall.Exhibit 2 Return on Invested Capital (ROIC) for European Automakers.
and ROIC Copyright © 2009 Pearson Prentice Hall.Exhibit 3 Porsche¶s Velocity. 1-9 . All rights reserved. Margin.
847 Invested capital = Shareholders' equity + Interest bearing debt = 2.683 Copyright © 2009 Pearson Prentice Hall.429 .106 Other liabilities 3.What is Invested Capital? Porsche's Managerial Balance Sheet.816 Shareholders' equity 1.323 + 2.429 If netted for cash = 4. If Porsche had dispensed the excess cash rather than retaining it.162 .791 1.323 ¼ 7.766 996 3. All rights reserved. 2003 Assets Cash NWC Net fixed assets Liabilities & Net orth Interest bearing debt ¼ 407 Other liabilities 3. Porsche has one other complicating factor: it possesses a large amount of non-interest bearing long-term liabilities. 2004 Assets Cash NWC Net fixed assets Liabilities & Net orth Interest bearing debt ¼ 2.755 + 407 = 2.797 ¼ 7.978 ¼ 1. undermining its ROIC.2.1.418 Shareholders' equity 2. µCash¶ is not free.162 If netted for cash = 2.106 = 4. it must be funded on the righthand-side of the balance sheet.978 Porsche¶s problem in recent years is that it has accumulated a very large cash balance. 1-10 . its invested capital base would not have grown. a feature of traditional German business practices.847 ¼ 2.259 3.781 = 1.216 ¼ 5.766 = 396 Porsche's Managerial Balance Sheet.755 ¼ 5. Invested capital = Shareholders' equity + Interest bearing debt = 1.
All rights reserved. including prioritization of VW¶s and Porsche¶s portfolio evolution. and is in need of a strong wage reduction and cost reduction initiative which is not consistent with Porsche¶s track record of accommodation of wage demands by auto industry workers That Porsche could have obtained the continuing services of VW and VW¶s technical resources in a variety of much more cost-effective (and shareholder friendly) methods That the expenditure/investment of more than ¼3 billion was an enormous use of corporate financial resources which would have generated better returns by simply being returned to shareholders (which had been the hope of much of the marketplace in recent years) That this decision is largely motivated by the personal ambitions and preferences and self-interests of Ferdinand Piëch. as well as the competitive conflicts between Porsche and Audi of VW A conflict of interest by Ferdinand Piëch. rather than indicative of any significant return to German solutions or German cronyism VW and major VW shareholders Auto Analysts and Critics and Stockholders Argue In the end may sustain Porsche¶s growth and profitability success story at the expense to non-family shareholders Copyright © 2009 Pearson Prentice Hall. non-executive chairman of VW.Porsche and Volkswagen Porsche says The investment of ¼3 billion in VW is to secure its on-going and future strategic partnership with VW VW is currently responsible for roughly 30% of Porsche¶s automotive manufacturing and assembly See a significant conflict of interest between Porsche and VW. 1-11 . and the grandson of the founder of Porsche and a major family member of the current owners and leaders of Porsche VW is one of the two biggest underperformers in the European auto industry at present.
the Boxster and Cayenne. The Porsche Boxster was manufactured by Valmet of Finland under a licensed manufacturing agreement allowed Porsche to effectively use ³other people¶s money. 1-12 . All three Porsche product lines ± the 911.´ Valmet owns its own factory and tools. and most recently the Cayenne ± enjoyed high operating margins compared to nearly any other major European automobile manufacturer. and builds the Boxster for Porsche. the Boxster. The two newer product lines. which is derived from the balance sheet. had both been launched with the capital and technology embedded within other companies. What strategic decisions made by Porsche over recent years had given rise to its extremely high return on invested capital? Return on invested capital (ROIC) combines operating margins.Porsche Changes Tack: Case Questions 1. The Porsche Cayenne was co-manufactured with Volkswagen. again greatly reducing the required capital to support Porsche¶s business. found on the income statement. Copyright © 2009 Pearson Prentice Hall. All rights reserved. This reduces the capital Porsche needs to support its own business significantly. The Cayenne chassis was assembled on the same production line as the Volkswagen Touareg in Bratislava in the Slovak Republic. with greater capital utilization.
One key point for class discussion here is whether the use of 3 billion euros to purchase a growing (and in the end controlling) position in VW was motivated by business needs to family bias? As the real results continue to roll out. But Porsche has seemingly focused on executing the business with the highest of regard for the company¶s long-term performance and profitability (much like a family owned business). 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). All rights reserved. the result of which has been obviously appreciated by the market. 1-13 . Vesi wondered if her position on Porsche might have to distinguish between the company¶s ability to generate results for stockholders versus its willingness to do so. This is considered as highly controversial because for the better part of the last 40 years academics have argued that management needs to share the same motivations. What do you think? This is a question which is growing in significance when investors examine the motivations and performance expectations of management in publicly traded companies. and risks as stockholders do ± the share price as core to investor and management returns. it appears to be more and more of both. Copyright © 2009 Pearson Prentice Hall.Porsche Changes Tack: Case Questions 2. rewards.
one of the primary drivers of share prices is a company which promises and delivers profitable growth in both the top-line and bottom-line of the income statement. salary and compensation (family members employed by the firm). 1-14 . The returns to a family from its ownership of a business are derived from distributed profits (dividends). in the end. the capital gains concept of a market driving a share price upwards is much more complex and difficult to ³drive´ from a leadership perspective than what most family based businesses focus on. Although the interests of family ownership and public shareholders are both based in growing and profitable and sustainable business. All rights reserved.Porsche Changes Tack: Case Questions 3. Clearly. Although the dividend yield concept is similar. there is. A family owned and managed business is as interested in sustainability and control as it is in rapid growth. The returns to a shareholder in a publicly traded firm are derived from dividends (dividend yield) and share price appreciation (capital gains). Copyright © 2009 Pearson Prentice Hall. and financial support (family members often enjoy company-owned assets and expenditures). there is one key difference between families and markets: a focus on growth. Is pursuing the interests of Porsche¶s controlling families different from maximizing the returns to its public share owners? Yes.
09. in the following month. the downward spike just prior to 27. then lost again. Source: Porsche.com . As illustrated here.05 is the market¶s reaction to the announcement ± a one day loss of approximately 10% of its value which was then largely recovered.Porsche¶s announcement of its investment in VW was not well-received by the equity markets.
Recovered and was very good by all comparable measures. Source: Porsche. however.com .Porsche¶s share price performance over the 2004-2005 period.