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Porsche Changes its

Tack
Abhishek Sinha
Anwesha
Chatterjee
GS Abhilash
Moumita Saha
Shreel Dwivedi
Uttam Chatterjee

Case Facts
Porsche is a publicly traded family controlled company
Porsche is a relatively simple company by product line, 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 manufactured & assembled by Porsche (Euro 1 Billion
Investment)
Close to 7000 million Euro sales in 2005.
Special dividend of Euro 14 per share declared in 2002, in addition to the regular
dividend.
Porsche has followed a strategy with both the Boxster and the Cayenne (out
sourcing & in sourcing) to leverage other companys capital & resources.
Porsche enjoyed an industry leading return on invested capital (ROIC), poorest in
03-04, but still far ahead of others.
Major announcements in 2005 indicated that Porsche was changing directions:

Q.1. What strategic decisions made by Porsche over recent years had
given rise to its extremely high return on invested capital?
All three Porsche product lines the 911, the Boxster & Cayenne enjoyed high operating margins
compared to nearly any other major European automobile manufacturer.
The Porsche Cayenne was co-manufactured with Volkswagen. The Cayenne chassis was assembled
on the same production line as the Volkswagen Touareg in Bratislava in the Slovak Republic, again
greatly reducing the required capital to support Porsches business.
The Boxster was produced in a similar fashion by using some other companys capital & resources.
40% of Operating Earnings by currency hedging. It may be noted that in 2004, Porsche has the
lowest sales, but the highest ROIC. This may be a result of an income generated from the currency
hedge.

Porsche did not add fixed assets to its invested capital basis, but cash (retained profits and debt
issuances).
Policy of minimal fixed-asset capital base.

Q.2. Vesi wondered if her position on Porsche might have to


distinguish between the companys ability to generate
results for stockholders versus its willingness to do so.
What do you think?
Facts

Porsches focus is on stakeholder wealth


It has followed what is generically referred to as stakeholder wealth maximization over its history, 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, creditors, management, employees, suppliers, customers,
community rather than focus solely on stockholders
Porsches focus may be one of self-interest
Porsche has frequently been accused of operating the company for the primary benefit of the Porsche and
Pich families, and management, over all other stakeholder groups
Rewards management in the company primarily on the basis of sales, profits, margins, 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, publicly traded companies, have moved to international standards
It has continued to report only semi-annually, not quarterly, arguing that it does not see its business
quarterly, and does not want to add to the short-term thinking common among equity investors in todays
equity markets

Although wanting to achieve family objectives by acquisition of a


stake in VW, it is closely aligned to shareholder benefit as well.
The objective behind acquiring VW may have been to avoid a
hostile takeover.
At the same time, VW was a very important supplier.
VW having a larger product portfolio than Porsche, would benefit
through technical know how & capital investments.

Q.3. Is pursuing the interests of Porsches


controlling families different from maximizing the
returns to its public share owners?
Yes, they are very different.
Shareholders would be more concerned about distribution of
dividends & capital appreciation.
Family, on the other hand, would be more concerned about
dividends as well as compensation/remuneration.
However, as is evident, Porsches focus was on growth, which
culminated the benefits of the stakeholders (family & shareholders
included).