VW shares surge as funds buy in panic
By Richard Milne and Kate Burgess in London
Published: October 28 2008 09:34 | Last updated: October 28 2008 19:55
Volkswagen briefly became the world’s largest company by market capitalisation on Tuesday after an extraordinary surge in its share price driven by a near-panic by hedge funds and other traders to stem losses on positions betting on a fall in the stock.
The extent of the surge, which has led to sharp criticism of German capital markets, triggered intense market speculation that it could force the collapse of hedge funds and heavy losses for investment banks.
VW’s share price rose 82 per cent to €945 following Monday’s 147 per cent jump, leaving it with a market capitalisation of about €287bn ($360bn).
At the stock’s intra-day peak of €1005, its market capitalisation exceeded Exxon before the US oil company started trading yesterday.
A manager at a large hedge fund said: “The losses will be extreme. I don’t think it is going to bring down a big fund but it will probably bring down some small ones.”
One London-based auto analyst said: “I have hedge fund managers literally in tears on the phone.”
The head of Germany’s largest fund manager accused Porsche – the largest investor in VW that sparked the quadrupling of its share price within two days – of acting against the interest of other shareholders.
Klaus Kaldemorgen, the head of DWS, which is a shareholder in VW and owned by Deutsche Bank, said: “I criticise heavily that a company like Porsche is manipulating VW shares in an irresponsible manner.”
The surge in VW’s share price started after Porsche disclosed on Sunday that it had increased its stake from 35 per cent to 42.6 per cent. In addition it has options over further 31.5 per cent, making a total of 74.1 per cent. Added to Lower Saxony’s 20.1 per cent stake, this effectively left a free float of only 5.8 per cent instead of the 45 per cent many expected.
Porsche did not respond to calls asking for comment on Mr Kaldemorgen’s statement but it told Reuters news agency on Tuesday: “We vehemently reject the accusation of share price manipulation.” Under German law, companies do not have to disclose option positions if they are settled through the receipt or payment of cash rather than being converted into shares. Porsche insists it has “cash-settled options”.
There was widespread expectation in the markets that the huge rise would push some fragile hedge funds – who bet on VW’s shares falling – to collapse with losses estimated at potentially €20bn-€30bn.
Several hedge funds and banks denied they had any large exposure to VW. Citadel, a large hedge fund, said: “We have suffered no losses of substance on Volkswagen whatsoever.
Morgan Stanley, whose shares fell 16 per cent, said it had “virtually no exposure” while people close to Goldman Sachs, whose stock also dropped, took a similar line.
ft.com
Porsche and Volkswagen
In a time when many odd economic events are taking place, this saga nonetheless deserves comment:
Volkswagen's shares more than doubled on Monday after Porsche moved to cement its control of Europe’s biggest carmaker and hedge funds, rushing to cover short positions, were forced to buy stock from a shrinking pool of shares in free float.
VW shares rose 147 per cent after Porsche unexpectedly disclosed that through the use of derivatives it had increased its stake in VW from 35 to 74.1 per cent, sparking outcry among investors, analysts and corporate governance experts.
This seesaw has been going on for some time and German regulators haven't done much about it, despite complaints from hedge funds. Today the share price rose by a factor of nearly five (!). So for a brief while Volkswagen became the world's largest company in terms of capitalization. Who needs Exxon and WalMart?
I thank Ben, a loyal MR reader, for the pointer to this episode.
Posted by Tyler Cowen on October 28, 2008 at 09:24 AM in Economics | Permalink
Comments
Why should German regulators do anything about it? I know many hedge funds involved in what's called the Porsche stub trade, and truthfully, it was flawed from the start. Essentially what happened is that earlier this year Porsche disclosed a sizeable stake in VW. Hedge funds figured out that the value of Porsche's stake in VW exceeded the enterprise value of Porsche, meaning in effect you were getting paid to own the operating business of Porsche. So to capture that spread, you go long Porsche and short VW. I know a number of funds that put this trade on and pitched it to me. The glaring flaw in their analysis though was that they assumed that Porsche, who had announced its intention to take a "majority" stake in VW, was going to stop accumulating at 50.1% because Lower Saxony controls 20% of VW and it was thought they would never acquiesce to a takeover by Porsche. Porsche never committed to stopping at 50.1%, and as this weekend's announcement shows, they didn't.
So what ended up happening was that the hedge funds were shorting VW as Porsche was acquiring it. It's akin to a reverse risk arb; in risk arb you buy the target and short the acquiror, here the funds were shorting the target and buying the acquiror. As would be expected, this is a recipe for disaster. Once Porsche announced they controlled 74.1% of the stock through owned shares and cash settled options (where their banks effectively control the shares), it became obvious that with only 5.9% of shares now in the free float (remember Saxony controls 20%) that the 13% of shares sold short were in a, shall we say, precarious position. Thus the single greatest short squeeze I have ever seen. VW is now valued at over 2x Toyota Motor despite being smaller and less profitable.
Posted by: joe at Oct 28, 2008 9:38:24 AM
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