A piece of German industrial tradition was consigned to the scrapheap yesterday by the European Court of Justice. Germany's "Volkswagen Law" , which in effect protected the car giant from takeover, was struck down.
VW has been shielded since 1960 by a law that limits investors' voting rights to a maximum of 20 per cent, to protect a strategic national asset. A stake of 20 per cent owned by the German state of Lower Saxony, where VW is based, also helped prevent unwelcome attention. The Court stated that the German government, which was defending the law against a case brought by the European Commission, "failed to demonstrate why such a position has to be maintained in order to protect the general interests of minority shareholders". The decision cannot go to appeal. Lower Saxony will retain its holding.
The move opens the way for Porsche, a 31 per cent stakeholder, to gain control of VW. Last month, Porsche said that it wanted to "significantly" increase the holding, and it said yesterday that it will "exercise its rights" as an investor. VW is important to Porsche because it supplies technology and manufacturing fac-ilities for its products, especially the highly profitable Porsche Cayenne, the SUV credited with keeping Porsche solvent. VW will build the forthcoming four-door Panamera sports car.
Should access to VW be jeopardised, the independence of Porsche itself would be threatened. The possibility of a foreign, possibly private equity, bid for VW prompted Porsche to protect its position in 2005. After Porsche's holding surpassed 30 per cent, it was forced to make a bid for VW and in March offered €35.9bn, the lowest legally permitted amount. The offer lapsed in May, and Porsche can now increase the stake to 50 per cent without having to make an offer to all shareholders.
"I now see Porsche flexing its muscles and going for outright control," said Stephen Pope, chief global market strategist at Cantor Fitzgerald. "That may bolster margins at VW and generate new cross-fert-ilisation ideas."
There are close links between the companies. Dr Ferdinand Porsche designed the original Beetle in 1936, and his grandson, Ferdinand Piech, is chairman of VW and the controlling shareholder in Porsche. Wendelin Wiedeking, chief executive of Porsche, is a member of the supervisory board of Volkswagen.
The two families have high hopes for Porsche and the VW group's varied brands, comprising VW, Audi, Bentley, Bugatti, Lamborghini, Skoda and Seat. VW's chief executive Martin Winterkorn said in July that the car maker would reach his goal for group profit of €5.1bn in 2007, a year earlier than planned. Mr Winterkorn is planning 12 new vehicle models over the next three years across the group, to boost sales 33 per cent to 8 million vehicles. The ultimate aim is to match Toyota in volumes and profitability; that will require a more determined effort to cut costs than has been seen hitherto. Without the spur to efficiency of a hostile takeover, the question is whether Porsche's cosy relationship with VW will help or hinder that goal.