HEDGING AT PORSCHE Case Solution
This had been seen between 1993 to 2002 when Ferdinand Piech had served as the CEO of Volkswagen, the head of the supervisory board of VW and at the same time, he had also served as the member of the supervisory board of Porsche. Furthermore, he owned a large number of the voting shares of Porsche and had the power to influence the decisions of the board. However, if there are no such conflicts of interests in future years, then there might be a decline in the extent to which Porsche had hedged and invested in Volkswagen through stock options and increased its investment over the time.
Over the time, Porsche had gained the reputation of being a cautious risk management company but the huge profits earned by the company by dealing with financial derivatives had also resulted in criticism from a number of analysts and the commentators. Most of the analysts stated that Porsche was more of a hedge fund than a car manufacturing company was. Therefore, if in future years the ownership structure of the company changes and any outside investors that have opposing views to the hedging policies of Porsche, gain voting rights on the board, then it can heavily influence the hedging strategy of Porsche.
Do you think that Porsche’s strategy of using options to acquire a stake in VW (instead of buying stock directly) is a sensible one? Or do you agree with the critics who argued that Porsche was speculating with shareholders’ money and that it had become a “hedge fund” that neglected its core business?
In 2005, Porsche had announced to buy a 20% stake of Volkswagen to prevent the hedge funds from taking over and breaking up VW. Porsche was also highly dependent on VW as it was its key supplier and the partner in a number of joint projects. 30% of the components used in manufacturing the Porsche cars were provided by VW. Furthermore, Porsche was also cooperating with VW to launch the Panamera in 2009. Furthermore, they were both coordinating with each other for the development of fuel cell and hybrid car models in the future years. As Porsche was a niche company therefore, it needed to have a reliable partner for achieving sufficient economies of scale.
Porsche did not invest directly in the shares of VW but instead the company had built up its share in VW by making extensive use of the call options on the ordinary shares of VW. This was a good strategy by Porsche to acquire a stake in VW because this would help Porsche to hedge against the future risk of a declining VW share price, as the profitability of the company was currently low. Most of the analysts had also argued that the breakup value of VW was considerably higher as compared to the value of the combined firm and many argued that VW suffered from many large inefficiencies.
Although the exact nature of the options had remained undisclosed but this was a good strategy for the company to lower its investment risk and enhance the returns from this investment. Furthermore, this strategy also made their relationship stronger. I completely disagree with the views of the critics that Porsche was speculating the money of its shareholders. Firstly, the company had developed the risk management policy to hedge its revenues from US and to develop a strategy to overcome the situation faced by the company in the 1990s, if faced again.
Secondly, acquiring the huge stake of about 50% in VW with the stock options was a good and justifiable strategy. If the management of Porsche had invested directly in the shares of VW then it could have resulted in conflicts of interest between the two companies and Porsche could not have made itself secure from the future risk of a price decline of the VW shares. Therefore, the company is not speculating with the money of its shareholders and it is not correct to consider Porsche as a hedge fund just because of the huge returns earned by the company from its hedging strategy……………..
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