Porsche's failed bid to take over Volkswagen in 2008 helped reveal not just the dangerous ways in which global finance operates today but also the disdain with which financial institutions are looked upon by the rest
The Background
In 2008, Porsche wanted to take over Volkswagen. By quietly building up its stake, Porsche drove up the share price of Volkswagen (VW). Hedge funds thought that the share price would fall and sold VW shares short—an advanced trading strategy in which borrowed shares are sold in the hope that the same stock can be later bought at a lower amount and returned.
But when Porsche disclosed that it owned 42.6 percent of the company’s stock and had options for another 31.5 percent, there was an instant short-squeeze—a situation in which a lack of supply and an excess demand for a traded stock forces the price upward. The hedge funds, which suffered huge losses, sued Porsche and accused it of manipulating the market.
Slow Hedge Funds
The surprise of hedge funds was surprising. Porsche had repeatedly stated its intentions regarding VW. Porsche’s financial statements disclosed their option trading. A Morgan Stanley analyst, Adam Jonas, had warned on October 8, 2008 of the risk of a short squeeze. Cautioning against playing “billionaire’s poker”, Jonas drew attention to the size of the short position on VW relative to the free float. Earlier on February 27, JP Morgan also identified the risk of a short squeeze. The bank had also predicted that Porsche would continue to increase its stake in VW.
(This story appears in the 13 April, 2012 issue of Forbes India. To visit our Archives, click here.)