As Porsche Takes Over VW, Big Three Find An Acquirer

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Porsche is not a very big car company, but it has had some special rights to buy a significant amount of equity in the largest car company in Europe–VW. The VW management has not warmed to the idea. Who wants to report to people from a tiny sports car company which has as a best seller a $100,000 SUV?

The Porsche people do have guts. VW has learned that the hard way, and one of the Big Three may be about to learn it as well.

According to The Wall Street Journal, "Porsche Automobil Holding SE said Friday the rift between its owners, the Piëch and Porsche families, has been resolved, and both families now fully support Porsche Chief Executive Wendelin Wiedeking’s plan to take over Volkswagen AG."

VW has a special distinction and that should add to the firm’s value. It is the only large car company in the world which expects to have a unit sales increase in 2008. The firm has the largest market share among auto companies in China, which at some point in the next decade is expected to become the world’s No.1 car market.

The Porsche/VW deal comes at the moment when The Big Three are facing the worst car sales environment since Alfred Sloan, the legend who built GM (GM), became its chairman in 1937.

It is almost certain that one of America’s big car companies will not survive as an independent company. That prediction may be proved if GM buys Chrysler sometime in the next month. Word is now that GM cannot raise the $10 billion or so it would need to finance the severance for about 60,000 people which would be part of the economy of combining the two companies.

At Ford (F), it appears that the company wants to sell Volvo to raise money. Ford’s shares are at $2. At some point soon the Ford family, which has a lock on the board due to its voting shares, will have to decide if they want its fortunes to go down with the ship.

Buying a US car company is primarily a matter of how many expenses can be eliminated and what will become of a large debt load. Buying out the common shareholders should not be a significant issue. Ford’s market cap is under $5 billion.

If GM believes it can fire 60,000 people by taking over Chrysler, VW would have to be able to find some impressive economies of scale by buying one of the Big Three. If it can save several billions of dollars a year, that would justify taking on the debt which would come with owning one of the American car companies.

VW has less than a 1% share of the US vehicles market. Ford’s quarterly revenue is still well over $40 billion. The German car company can buy that for a few pennies on the dollar.

Douglas A. McIntyre