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Last Updated: Monday, 26 September 2005, 17:28 GMT 18:28 UK
Porsche wants 20% Volkswagen deal
Porsche and Volkswagen logos
Porsche and Volkswagen are two of Germany's biggest brands
German luxury carmaker Porsche has said it will buy a 20% stake in Volkswagen to prevent any hostile takeovers that could threaten their business links.

Porsche owns about 5% of Europe's biggest carmaker and boosting its stake is set to cost more than $3bn (1.7bn).

Shares in Porsche fell 10% in Monday trading in Frankfurt. VW shares also declined, but only by 0.6%.

Porsche developed its 4X4 Cayenne vehicle with VW, and the firms are working together on a hybrid motor.

The links between the companies go back a long way and Volkswagen's current chairman of the supervisory board, Ferdinand Piech, is the grandson of Porsche founder Dr Ferdinand Porsche.

Dr Porsche helped develop VW's massive-selling Beetle car.

Law change

The move by Porsche was forced by concerns that a European court may be set to overturn a law protecting VW from takeover.

"Porsche is taking this decision because VW is now not only an important development partner for Porsche, but also a significant supplier for approximately 30% of Porsche's sales volume," the company said.

The move comes as a surprise to us and may receive mixed messages from the market
Morgan Stanley

VW has welcomed the move, saying a stable shareholder structure was important for its long-term business prospects.

Its shares have surged amid speculation that a large investor was building a stake in preparation for a takeover.

The stock added 17% last week, closing at a three-year-high of 51.86 euros on Friday. Trading volumes also have jumped to many times the daily average.

"We assume, given the talk in the market of a size buyer of VW stock and the rise over the past two weeks, that Porsche has already made a start on its 20% target," said Michael Tyndall, an analyst at Nomura in London.

During early afternoon trading in Frankfurt, shares in Porsche were down by 8.9% at 618.50 euros. VW fell initially, but recovered to trade 1.8% higher at 52.45 euros.

'Mixed message'

VW's other main shareholder is the German state of Lower Saxony, which owns an 18.2% stake.

Together, the local government and Porsche would control a majority of voting rights in VW.

Porsche shareholders were less pleased about the move, with some complaining that the money could be better spent elsewhere and the deal would hurt the value of their investments.

"The move comes as a surprise to us and may receive mixed messages from the market," investment bank Morgan Stanley said.

"For Porsche, the thought of spending 3.3bn euros for the equity of Europe's largest auto producer is controversial and likely to come under intense scrutiny."

A spokesman for Porsche looked to calm concerns that the move may be a prelude to a full-blown takeover move.

"The stake will in no case reach the level at which Porsche would have to make a public offer to take over VW," the company said.

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