VZCZCXRO7739
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #2654/01 2380943
ZNR UUUUU ZZH
O 250943Z AUG 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7796
INFO RUCNFRG/FRG COLLECTIVE IMMEDIATE
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHBS/USEU BRUSSELS
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 FRANKFURT 002654 
 
DEPARTMENT FOR EUR/AGS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND ENRG PGOV SENV GM
SUBJECT: Porsche Steps up VW Takeover Effort 
 
REF: Frankfurt 1515 
 
¶1.  SUMMARY: Porsche, Germany's smallest automobile maker, has 
received permission from the EU to pursue a takeover of Volkswagen 
and has stepped up its efforts to acquire a majority stake in the 
company.  Major hurdles remain, such as how to divide power in the 
supervisory board of a merged entity as well as state and federal 
government resistance to the move.  Porsche will continue to pursue 
the takeover aggressively, as it offers a way for it to comply with 
EU CO2 emissions standards while also becoming a much larger player 
in the industry.  END SUMMARY. 
 
EU Gives Green Light 
-------------------- 
 
¶2.   On July 23, the EU Commission approved Porsche's proposed 
attempt to take over Volkswagen (VW) saying that a merger would not 
hinder competition in the industry and related sectors. 
Family-owned Porsche, which currently owns 35.6% of VW stock, is 
looking to increase its holding to a controlling 51% stake. 
Regulators in the U.S., China and Russia have already given approval 
for a takeover as it relates to the interests of the two companies 
in those countries. 
 
¶3.  If the plan goes forward, the newly-created Porsche Holding 
Societas Europaea (SE) would become a new automobile giant in 
Europe.  The company would also be at less risk of a hostile 
takeover, which many feared would happen to VW in 2005 when its 
share price tumbled.  With profits currently dipping in the German 
automobile sector, companies such as VW and Daimler, which have no 
majority owner, remain at risk to such a move.  A merger would also 
help Porsche comply with the EU directive to lower CO2 emissions to 
120g per kilometer by 2012.  Porsche's high-powered fleet presently 
produces 297g of CO2 per kilometer, the highest emission rate 
worldwide (see reftel).  The average emission of a combined fleet 
would be significantly lower, giving Porsche a way around making 
drastic changes to its cars or paying large fines. 
 
But Obstacles Remain 
-------------------- 
 
¶4.  The takeover attempt gained momentum when the EU struck down 
Germany's so-named "VW law" in late 2007 arguing that it violated 
the free flow of capital.  The law, created in 1960, gave the State 
of Lower Saxony a 20% blocking stake in VW, enabling it to prevent 
moves such as takeovers.  A new version of the law, which attempts 
to comply with EU standards while also preserving Lower Saxony's 
blocking privilege, was passed by the German federal parliament 
(Bundestag) in May 2008.  The EU Commission is presently reviewing 
the new law and many experts think it will also be struck down. 
Nevertheless, a merger can not be finalized until the commission 
rules. 
 
¶5.  The distribution of works council seats on the supervisory board 
of the new holding company has also turned into an obstacle in the 
negotiations.  Like other  large Germany-based companies, VW and 
Porsche follow the co-determination model where a works council 
represents employees on the supervisory board.  The current plan 
gives three seats to workers of each branch.  Bernd Osterloh, chief 
of the VW Works Council, argues that with VW's 324,000 employees its 
workers deserve greater representation than Porsche's 12,000. 
Osterloh filed an interim injunction and other charges, which 
Ludwisgburg and Stuttgart Labor Courts rejected in November 2007 and 
April 2008 respectively.  The VW Works Council appealed August 13 
and a ruling is expected by the end of the year, but further appeals 
are possible which could further postpone a takeover.  Osterloh has 
refused to attend a "peace summit" planned by the Metal Union IG 
Metal on co-determination unless the Porsche and VW Supervisory 
Board Chairmen also attend.  The current ten-year agreement between 
Porsche and its works council cannot be terminated without agreement 
from the works council.  Industry experts see in Osterloh's effort a 
fear of the changes Porsche would bring to the work culture at VW, 
including longer working hours, lower wages and a greater focus on 
profits, although Porsche has not explicitly said it would take such 
measures. 
 
A Family Reunion of Sorts 
------------------------- 
 
¶6.  Despite the differences in size, ownership structure and 
business model, VW and Porsche have intertwined histories that make 
a merger more likely.  After founding Porsche in 1931, Ferdinand 
Porsche served as CEO of the newly founded VW in the 1930s and 1940s 
and designed the Beetle.  He returned to Porsche after the war. 
Ferdinand Piech, one of his grandsons and one-time VW CEO, is 
currently Supervisory Board Chairman at Volkswagen.  The two 
branches of the Porsche family, Porsche and Piech, jointly run 
Porsche.  Long before the planned takeover, both companies had 
 
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shared research and development projects and suppliers.  The Porsche 
Cayenne, VW Touareg and Audi Q7 are built on the same platform. 
 
¶7.  Porsche began increasing its 20% ownership of VW in 2005 to its 
current level.  The move was initially seen as beneficial to 
Volkswagen in preventing a hostile takeover, but has also been 
criticized as a "creeping takeover" by a well-capitalized 
privately-owned company of a publicly-listed competitor exposed to 
the vicissitudes of the equities market.  While Porsche produces far 
fewer cars than VW (96,794 to 5.2 million), its profit of 4.24 
billion euros ($6.19 billion) in 2007 is slightly greater than VW's 
4.12 billion ($6.01 billion). 
 
¶8. COMMENT: Merging Porsche and VW would create the second largest 
automotive company worldwide that would also be able to comply with 
EU CO2 emissions standards.  Possible factors that could derail the 
attempt include an economic downturn in Germany that hit automobile 
firms' profit margins and political maneuvering at the state or 
federal level against the move.  While the way forward for a 
takeover is not yet completely clear, few of these barriers appear 
insurmountable in the long term.  END COMMENT. 
 
¶9.  This cable was coordinated with Embassy Berlin and ConGen 
Hamburg. 
POWELL