C01 MiniCase Porsche

7/24/2019 C01 MiniCase Porsche

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Copyright 2009 Pearson Prentice Hall. All rights reserved.

Yes, 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

Porsche Changes Tack

Will Porsches new strategy actually create shareholder value?


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Porsche is a publicly traded family controlled company

Porsche is a relatively simple company by product line, having three existing andone newly proposed products:

911 the only model produced and assembled completely by Porsche

Boxster licensed manufacturing with Valmet of inland

!ayenne co"manufactured with Vol#swagen of $ermany

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 automa#er

Porsche has followed a strategy with both the Boxster and the !ayenne whichuses a combination of licensing, out"sourcing, and in"sourcing to leverage otherpeople&s money

(s a result of its strategy, Porsche has en)oyed an industry leading return oninvested capital %*+!'

But two ma)or announcements in the summer and fall of -../ seemingly indicatethat Porsche is changing directions:

0he Panamera will be manufactured in"house, with Porsche&s own money

Porsche has invested billion in ta#ing a -.2 interest in Vol#swagen %$ermany', one of theworst performing automa#ers in the world

An Overview of Porsche AG,

2005


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13 4hat strategic decisions made by Porsche overrecent years had given rise to its extremely highreturn on invested capital5

-3 Vesi wondered if her position on Porsche mighthave to distinguish between the company&s abilityto generate results for stoc#holders versus itswillingnessto do so3 4hat do you thin#5

3 s pursuing the interests of Porsche&s controllingfamilies different from maximi6ing the returns toits public share owners5

Porsche Changes Tack:

Case Questions


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Exhiit ! Porsches Growth in Sales,

Proits and !argin


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Porsche"s Ex#an$ing P%atfor&s

an$ Growing 'a%es

7nits

!ote" #$cl%des sales o& the discontin%ed 92' and 944(9)' *odels in 1994-199). +hese *odels totaled 100 in 199 and 104 in 100).

The Cayenne was the single most successful new automobile launch in history.


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Porsche&s focus is on stakeholder wealth t has followed what is generically referred to as stakeholder wealth maximizationover

its history, rather than the increasingly common focus on stockholder wealthmaximizationcommon in the (nglo"(merican mar#ets

8ta#eholder wealth maximi6ation attempts to balance in theory the needs and returns

to the multitude of corporate sta#eholders stoc#holders, creditors, management,employees, suppliers, customers, community rather than focus solely on stoc#holders

Porsche&s focus may be one of self"interest Porsche has freuently been accused of operating the company for the primary benefit

of the Porsche and Pich families, and management, over all other sta#eholder groups

*ewards management in the company primarily on the basis of sales, profits, margins,and other financial measures of corporate performancerather than stoc# or stoc#options based on market performance

Porsche has continued to fight industry standards for reporting and disclosure t has continued to report according to $erman accounting standards long after most

other $erman companies, publicly traded companies, have moved to internationalstandards

t has continued to report only semi"annually, not uarterly, arguing that it does not seeits business uarterly, and does not want to add to the short"term thin#ing commonamong euity investors in today&s euity mar#ets

Cor#orate Governance at Porsche


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Copyright 2009 Pearson Prentice Hall. 1-,

(anaging to (etrics: )O*C

*+!= X

+perating Profits

(fter"tax

8ales

8ales

nvested !apital

+perating ;argin Velocity

*eturn on invested capital is composed of two components calculated from the firm&s income

statement and balance sheet, termed operating marginand velocity3

n both cases, bigger is better3 0he larger the operating marginand the greater the velocity,

the greater the return on invested capital3 0raditionally, most companies focus on the operating

margin, often concluding they have little capability to alter their basic velocity value3 Velocity

itself will change only with changes in corporate strategy including licensing and out"sourcing

at Porsche, or the growing influence of in"sourcing in other industries3


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Exhiit 2 "et#rn on $nvested Capital

%"&$C' or (#ropean A#to)a*ers, 200+


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Exhiit + Porsches elocity,

!argin, and "&$C


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hat is Invested Capital-Porsche&s problem in

recent years is that ithas accumulated a very

large cash balance3

be funded on the right"

hand"side of the balance

sheet3 f Porsche had

dispensed the excess cash

rather than retaining it,

its invested capital base

would not have grown,

undermining its *+!3

Porsche has one other

complicating factor: itpossesses a large amount

of non"interest bearing

long"term liabilities, a

feature of traditional

$erman business practices3


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Porsche says 0he investment of > billion in V4 is to secure its on"going and future strategic partnership with V4

V4 is currently responsible for roughly .2 of Porsche&s automotive manufacturing and assembly

V4 and ma)or V4 shareholders 8ee a significant conflict of interest between Porsche and V4, including prioriti6ation of V4&s and

Porsche&s portfolio evolution, as well as the competitive conflicts between Porsche and (udi of V4

( conflict of interest by erdinand Pich, non"executive chairman of V4, and the grandson of the founderof Porsche and a ma)or family member of the current owners and leaders of Porsche V4 is one of the two biggest underperformers in the ?uropean auto industry at present, and is in need of a

strong wage reduction and cost reduction initiative which is not consistent with Porsche&s trac# record ofaccommodation of wage demands by auto industry wor#ers

(uto (nalysts and !ritics and 8toc#holders (rgue 0hat Porsche could have obtained the continuing services of V4 and V4&s technical resources in a variety

of much more cost"effective %and shareholder friendly' methods

0hat the expenditure@investment of more than > billion was an enormous use of corporate financialresources which would have generated better returns by simply being returned to shareholders %which had

been the hope of much of the mar#etplace in recent years' 0hat this decision is largely motivated by the personal ambitions and preferences and self"interests of

erdinand Pich, rather than indicative of any significant return to German solutionsor German cronyism

In the end may sustain Porsches growth and profitability success story at the expense to non!family shareholders

Porsche an$ .o%kswagen


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13 4hat strategic decisions made by Porsche over recent years had givenrise to its extremely high return on invested capital5

et%rn on invested capital /C co*ines operating *argins &o%nd on theinco*e state*ent ith greater capital %tili5ation hich is derived &ro* the alancesheet.

All three Porsche prod%ct lines 6 the 911 the 7o$ster and *ost recently theCayenne 6 en8oyed high operating *argins co*pared to nearly any other *a8or#%ropean a%to*oile *an%&act%rer.

+he to neer prod%ct lines the 7o$ster and Cayenne had oth een la%nchedith the capital and technology e*edded ithin other co*panies.

+he Porsche 7o$ster as *an%&act%red y al*et o& :inland %nder a licensed*an%&act%ring agree*ent alloed Porsche to e&&ectively %se ;other peoplesagen. +he Cayenne chassisas asse*led on the sa*e prod%ction line as the ol>sagen +o%areg in 7ratislavain the ?lova> ep%lic again greatly red%cing the re@%ired capital to s%pportPorsche


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-3 Vesi wondered if her position on Porsche might have to distinguish between

the company&s abilityto generate results for stoc#holders versus its

willingnessto do so3 4hat do you thin#5

+his is a @%estion hich is groing in signi&icance hen investors e$a*ine the

*otivations and per&or*ance e$pectations o& *anage*ent in p%licly traded co*panies.

Porsche reards *anage*ent on %siness &inancial per&or*ance 6 the n%*ers &o%nd onthe three *a8or &inancial state*ents 6 and not on the *ar>etholders do 6 the share price as core to investor and *anage*ent ret%rns.

7%t Porsche has see*ingly &oc%sed on e$ec%ting the %siness ith the highest o& regard

&or the co*panye a &a*ily oned

%siness the res%lt o& hich has een ovio%sly appreciated y the *ar>et.

/ne >ey point &or class disc%ssion here is hether the %se o& 3 illion e%ros to p%rchase a

groing and in the end controlling position in as *otivated y %siness needs to

&a*ily iasB As the real res%lts contin%e to roll o%t it appears to e *ore and *ore o& oth.


Case Questions


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3 s pursuing the interests of Porsche&s controlling families different frommaximi6ing the returns to its public share owners5

es there is. Altho%gh the interests o& &a*ily onership and p%lic shareholders are othased in groing and pro&itale and s%stainale %siness there is one >ey di&&erenceeteen &a*ilies and *ar>ets" a focus on growth.

+he ret%rns to a &a*ily &ro* its onership o& a %siness are derived &ro* distri%ted pro&itsdividends salary and co*pensation &a*ily *e*ers e*ployed y the &ir* and &inancials%pport &a*ily *e*ers o&ten en8oy co*pany-oned assets and e$pendit%res.

+he ret%rns to a shareholder in a p%licly traded &ir* are derived &ro* dividends dividendyield and share price appreciation capital gains. Altho%gh the dividend yield concept issi*ilar the capital gains concept o& a *ar>et driving a share price %pards is *%ch *oreco*ple$ and di&&ic%lt to ;drive= &ro* a leadership perspective than hat *ost &a*ily ased

%sinesses &oc%s on. Clearly in the end one o& the pri*ary drivers o& share prices is a co*pany hich pro*ises

and delivers pro&itale groth in oth the top-line and otto*-line o& the inco*e state*ent.A &a*ily oned and *anaged %siness is as interested in s%stainaility and control as it is inrapid groth.


Case Questions


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Porsche&s announcement

of its investment in V4

was not well"received by

the euity mar#ets3

(s illustrated here, the

downward spi#e )ust

prior to -A3.93./ is the

mar#et&s reaction to the

announcement a oneday loss of approximately

1.2 of its value which

was then largely recovered,

then lost again, in the

following month3

8ource: Porsche3com


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Porsche&s share price

performance over the

-.."-../ period, however,

*ecovered and was very

good by all comparable

measures3

8ource: Porsche com

C01 MiniCase Porsche

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