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Porsche Exposed Case Solution
Porsche a public listed company has been the leading performance sports car manufacturer for years. The control of the company has traditionally been in hands of the Porsche and Piech family and the company has always been stringent in regards to reporting and compliance requirements. It has outperformed its competitors in financial performance having the highest margins, highest return on invested capital, and highest price to earnings ratio in the European auto manufacturer industry. Like all other players in the industry, a significant risk faced by Porsche is exposure to fluctuations in the exchange rate. The majority of sales of Porsche come from United States and United Kingdom while its production facility is located in Germany. This leads to a mismatch in the currency of revenue and costs. While other European auto manufacturers hedge against this foreign exchange risk by basing production in United States, Porsche does not want to risk its brand image. Thus Porsche hedges against currency risk by buying put options, however, recent analysis has hinted at the fact that this strategy might not be profitable and a different strategy for the long term needs to be considered.
Following questions are answered in this case study solution
Porsche is a rather special case of corporate governance. Who are Porsche’s primary and secondary stakeholders, and how does current management work with and for those stakeholders?
How does Porsche differ—operating structure, manufacture, financial results, etc.—from other major European-based auto manufacturers?
Describe Porsche’s foreign exchange operating (economic) exposure. How has the company been managing this exchange rate exposure? What are the consequences for Porsche if the USD becomes stronger?
Is Porsche’s currency exposure management strategy significantly different from its major competitors?
What methods are theoretically available to Porsche to manage or hedge its currency exposure? Why have these other methods not been used?
How do you think Porsche has been running its currency options hedging program? How are the positions constructed and managed?
a. Assume Porsche had decided to initiate their three-year option hedge program in July 2001.
b. Consider what kind of options Porsche must buy in order to establish its three-year rolling currency option program. When making the calculation and planning, simplify the analysis to an annual purchase and valuation.
c. Employ the Garman-Kohlhagen model to value the options. The ingredients of the model can be found in Appendix 8 of the case.
d. Was Porsche’s strategy profitable when taking option premiums into account?
Case Analysis for Porsche Exposed
1. Porsche is a rather special case of corporate governance. Who are Porsche’s primary and secondary stakeholders, and how does current management work with and for those stakeholders?
Porsche is a publicly-traded German auto-manufacturer traded on Frankfurt Stock Exchange. Primary stakeholders are the parties that have a direct stake in a company and usually have a financial stake in a business that contributes to its success. Porsche's primary stakeholders include shareholders who have invested money in the company, its management and employees, suppliers, and buyers. Secondary stakeholders are parties that do not involved engage directly with the company. Porsche's secondary stakeholders include competitors in the auto manufacturing industry, government, labor unions, media, and environmental groups among others.
The most significant primary stakeholder of Porsche is the shareholders that invest in the company and hold decision-making power. Porsche is a closely held company with company control and decision-making power being firmly in the hands of two founding families – Porsche and Piech family. Porsche has two classes of shares, ordinary and preference shares. All of the 8.75 million shares are held in the hands of these two families. The second class of shares, the preference shares allow investors holding it to share in the company profits but do not give them control. There are a total of 8.75 million preferences that are traded publicly on stock exchange out of which half of them are held by large institutional investors in United Kingdom, Germany, and United States. Another significant primary stakeholder is the customers that purchase its cars. Porsche operates in a variety of market segments, despite it being located in Germany, its sports cars are highly famous in United States and hence its customers are spread across the globe. The suppliers that supply the various parts assembled to produce cars are also an important primary stakeholder and Porsche’s relationship with them is of great importance for company’s success. Secondary stakeholders such as environmental protection groups can influence Porsche to for instance reduce their carbon footprint, however, they do not have direct control and power of the company.
2. How does Porsche differ—operating structure, manufacture, financial results, etc.—from other major European-based auto manufacturers?
Porsche is a privately held company with all of its ordinary shares and effective control of the company in hands of the Porsche and Piech families. Porsche has a reputation in the industry for being very stringent with reporting its financial results to the general public and is not very flexible in complying with reporting and listing requirements. It continues to report under the non-transparent German accounting standards and does not publish quarterly financial results, even being removed from the Frankfurt stock exchange in 2002 for refusing to publish quarterly statements. Porsche has also undergone a major change in its product portfolio compared to other European auto manufacturers that have sold only their signature products for years. Management compensation is dependent on Porsche's profitability year to year and not on the share price as is usually the case in other firms.
Despite being a small car manufacturer, Porsche compared to other European-based auto manufacturers has shown considerably better financial performance with its financial health being stellar over the past years. Porsche has the highest operating and gross margins, greatest revenue per vehicle, highest price-to-earnings ratio, and highest return on invested capital in the auto manufacturing industry. Hence, Porsche has been effectively outperforming all players in the European auto industry at every financial metric. With other luxury car manufacturers such as BMW, Volkswagen, and Renault having an average of 45% total debt to total assets, Porsche along with Audi take upon very low levels of long-term debt, with Porsche's debt to total assets ratio being as low as 6.4%. An issue commonly faced by all European car manufacturers including Porsche is the foreign exchange risk. While most European auto manufacturers use hedging to protect against the foreign exchange risk for dollar and pound, Porsche does not use hedging but instead makes use of the more aggressive strategy of put options.
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