August 24 - Jitan Solanki
Discover the best markets and strategies to invest in during risky times.
This is a real-life story that could rival the political intrigues and power struggles of Game of Thrones. It’s the tale of an epic collision of automakers: Porsche’s audacious attempt to swallow the much bigger Volkswagen Group (VW).
But it’s also a story of a spectacular short sale that cost investors billions of euros. So what the heck does a takeover attempt have to do with the stock market?
Porsche had already begun to quietly buy up shares and options in VW as early as 2005. Its ultimate goal was to take over VW, a company that made 50 times more cars. (Though it publicly denied this.) To achieve this, the company borrowed heavily from banks.
Then all hell broke loose in September 2008 as the Lehman Brothers’ collapse rocked the financial world to its core. It seemed as if the markets had gone bungee jumping without a cord. Banks stopped handing out loans as if they were candy.
Naturally, speculators assumed Porsche would run out of money to buy more VW shares. Once this happened, they reasoned, the stock would plummet. As a result, VW became one of the most shorted stocks on the market.
But on October 26, Porsche revealed its shockingly huge holdings in VW. It had not only raised its stake but it had also secretly purchased 31.5% of options (that is, the right to buy these shares at a certain time). In total, it had locked up 74.1% of all VW shares in the market! Since the local German state of Lower Saxony held about 20%, that meant only 5.7% of shares were still available on the market.
This was the worst news ever to short sellers. Hedge funds and other investors who had bet on the VW stock falling now faced a huge problem. Panicked short sellers scrambled to buy shares at any price to cover their positions and cut their losses. (This is known as a short squeeze since short sellers are ‘squeezed’ out of their positions.)
Thanks to the buying frenzy, VW’s share price shot up from €200 euros to over €1000 in just days. In fact, VW fleetingly became the most valuable company in the world. But those that had bet against the stock suffered the consequences…
While Porsche had made a fortune on paper, hedge funds collectively lost about €15 billion euros in one day.
As it turns out, all of Porsche’s scheming had been in vain. In its takeover attempt, Porsche had racked up €11 billion in debt and teetered on the verge of bankruptcy. And who came to the rescue with an emergency loan? You guessed it – Volkswagen.
By 2012, VW was taking over Porsche instead of the other way around. Perhaps Porsche could’ve learnt something from the Biblical tale of David and Goliath: If you’re going to take on a giant, make sure you don’t miss.