Wednesday 29 October 2008

The Porsche Corner

I first got wind of this from Brad DeLong’s comment on those who don’t learn from history are forced to repeat it.. Very true.

Porsche have managed to pull off quite an amazing stunt on the financial markets. They have been trying to take control of Volkswagen for the past few years and have been steadily acquiring more shares with a stated objective of gaining control of 50% of VW. This has been well known and Porsche’s execution of their plan was no particular secret. What was not known until earlier this week is that Porsche clearly went into overdrive recently and by the start of the week they had control of ~74.1% of VW’s shares (30.1% were in options they had acquired without anyone noticing). Of the remainder, 20.1% is owned by the State of Lower Saxony so this only left about 5% of shares actually available to anyone. Meanwhile quite a number of Hedge funds had taken significant short positions in VW (totally somewhere between 12.5 and 16% of the total volume of VW shares) assuming that their share price would be falling given the imminent recession, current market conditions and all the other perfectly valid reasons for thinking such things. Unfortunately they weren’t watching Porsche (or the overall net position of VW options either) closely enough. Once Porsche announced that they either owned or had controlling interest in over 74% of VW the holders of those shorts realized that 16 into 6 doesn’t go and had to scramble to acquire the shares they needed to ensure they could close out their short positions as quickly as possible – and since there weren’t enough to go round VW’s stock price took off like a rocket – it rose by 348% in just two days going from €278 to over €940. That latter price made VW briefly the most valuable company in the world as measured by Market Capitalization (at $376bn). Clearly that was an artificial situation but it’s pretty incredible that a relatively small company like Porsche (market Cap about €10bn) could be the owner of almost 3/4 of the worlds biggest company just by pulling off a stunt (albeit a very shrewd and well prepared one).

And now for the best bit. Today Porsche indicated that they might settle 5% or so of the 31% of VW’s shares that it holds options on in order to “increase the supply of shares”. VW’s stock price plummeted to €517 on that news  which is no surprise as the previous days closing astronomical price was solely caused by lack of supply forcing the Hedge funds to bid up in order to limit their losses. Still that 5% will probably more than cover the entire cost of the exercise for Porsche. And also note that that only covers about half those with short positions so in order to close out the shorts a lot of those shares are going to have to change hands subsequently amongst those holding the current short positions. Talk about Porsche having their cake, eating it, then making you pay for it and forcing you to pay for it again.

There are lots of folks crying foul over this – not least all the Hedge Funds that have been burned to the tune of a collective €100bn or more. Then again they really should have done their homework better. I notice that apart from the pure Hedge funds there are also some familiar high profile actors from the recent broader financial drama that are also prominent players on this particular stage – viz Societé Generale, Morgan Stanley and Goldman Sachs. Those guys are really having a bad year.

More details here: (a follow up from Brad DeLong)

and earlier

and some history from last year with a fairly technical article that shows how well planned this Porsche assault on VW had been

It’s especially interesting to see how Porsche have mostly funded this entire exercise through trading VW options. That they were able to consistently make money doing that and at the same time create a climate where they could corner the market without all the other market experts noticing is nothing short of brilliant.

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