October 29, 2008
Panicked Traders Take VW Shares on a Wild Ride
By MICHAEL J. DE LA MERCED and CARTER DOUGHERTY
Panicked Traders Take VW Shares on a Wild Ride
By MICHAEL J. DE LA MERCED and CARTER DOUGHERTY
German regulators are analyzing a torrent of panicky trading in Volkswagen shares that at one point Tuesday turned VW into the world’s most valuable company while wreaking havoc with several big banks and hedge funds.
Shares in the German automaker rose as high as 1,005 euros, or $1,258 Tuesday after surging 146 percent to 471 euros Monday, the day after Porsche, a rival seeking to build up one of Europe’s great automotive dynasties, said it had effectively gained 75 percent of VW’s voting shares. On the Friday before the announcement, Volkswagen’s shares had closed at 210 euros.
Porsche has waged a series of bitter legal and political battles in the last three years to gain control of Volkswagen, a company whose foundations were laid by Porsche’s own founder, Ferdinand Porsche. On Sunday, Porsche appeared to have closed in on its target, announcing it had raised its stake in Volkswagen to 42.6 percent from 35 percent, and that it had options for another 31.5 percent.
Porsche said it issued its statement partly to give investors who bet that Volkswagen’s stock would weaken after a takeover “the opportunity to close their positions unhurriedly and without bigger risk.”
But that offer turned to dross when trading opened Monday, as investors known as short-sellers who had been betting that Volkswagen shares would lose value if Porsche took control were blindsided by the announcement. Earlier this year, Porsche had said it would not raise its then-31 percent holding, largely to calm a long-running conflict with the German state of Lower Saxony, which owns a 20.2 percent stake in VW that it uses to protect thousands of VW’s unionized autoworkers.
But when Porsche hinted that, at long last, it might be poised to bring Volkswagen under its thumb, it short-circuited several strategies that had been used by hedge funds and trading desks in New York and London.
One was to exploit the difference in value between two classes of Volkswagen stock by betting against a decline in one of them. Another was to buy into Porsche while betting that Volkswagen shares would fall, in a bid to profit from Porsche’s expected success.
Many short-sellers had borrowed the VW shares that Porsche is entitled to through its options contracts in order to speculate on Volkswagen stock, analysts said. But Porsche’s statement appeared to have prompted the banks that wrote the options contracts to demand those shares back, so as to have them ready for Porsche.
As of last week, roughly 12.9 percent of Volkswagen shares were lent out, according to Data Explorers, a London research firm. It was an unusually high number and the most for any member of the DAX in Germany.
With Porsche already owning so much of Volkswagen, and more shares tied up in stock funds linked to Germany’s DAX stock market index, the number of VW shares that were readily available for sale, known as the “free float,” was relatively small. That amplified the effect of the dash to buy Volkswagen shares, as demand vastly outstripped supply and drove the price higher when speculators betting against VW sought to cover their losses by buying.
“There is no other explanation than Porsche’s counterparties are lending out the shares,” said Arndt Ellinghorst, head of European automotive research at Credit Suisse in London. “That means heavy losses for funds who shorted them.”
Shares in Morgan Stanley, Goldman Sachs and Société Générale of France all tumbled on Tuesday on concern the banks might be caught on the wrong side of trades involving Volkswagen. Morgan Stanley said it had no exposure to the automaker.
It is not the first time Volkswagen shares have fallen prey to speculative gyrations. It lost a quarter of its value on Oct. 20 as short-selling seemed to gain traction amid a sense that Volkswagen would lose value if Porsche could steer decisions at the larger company to its advantage.
In a broader sense, the losses that Porsche has inflicted on short-sellers are collateral damage inflicted during its campaign to bring Volkswagen firmly under its thumb.
Although the two companies are linked by one powerful individual, Ferdinand Piëch, who heads Volkswagen’s board and also sits on Porsche’s, VW employees and their union have fought against a full takeover by Porsche, largely through their alliance with Lower Saxony, whose “golden share” lets it block major decisions about Volkswagen.
But the European Union is closing in on a ruling — the second since Porsche bought into Volkswagen — that would force Germany to alter the law underpinning the state’s share. That has created an opening for Porsche, which is based in Stuttgart, to assert control.
(=> nytimes.com)
Shares in the German automaker rose as high as 1,005 euros, or $1,258 Tuesday after surging 146 percent to 471 euros Monday, the day after Porsche, a rival seeking to build up one of Europe’s great automotive dynasties, said it had effectively gained 75 percent of VW’s voting shares. On the Friday before the announcement, Volkswagen’s shares had closed at 210 euros.
Porsche has waged a series of bitter legal and political battles in the last three years to gain control of Volkswagen, a company whose foundations were laid by Porsche’s own founder, Ferdinand Porsche. On Sunday, Porsche appeared to have closed in on its target, announcing it had raised its stake in Volkswagen to 42.6 percent from 35 percent, and that it had options for another 31.5 percent.
Porsche said it issued its statement partly to give investors who bet that Volkswagen’s stock would weaken after a takeover “the opportunity to close their positions unhurriedly and without bigger risk.”
But that offer turned to dross when trading opened Monday, as investors known as short-sellers who had been betting that Volkswagen shares would lose value if Porsche took control were blindsided by the announcement. Earlier this year, Porsche had said it would not raise its then-31 percent holding, largely to calm a long-running conflict with the German state of Lower Saxony, which owns a 20.2 percent stake in VW that it uses to protect thousands of VW’s unionized autoworkers.
But when Porsche hinted that, at long last, it might be poised to bring Volkswagen under its thumb, it short-circuited several strategies that had been used by hedge funds and trading desks in New York and London.
One was to exploit the difference in value between two classes of Volkswagen stock by betting against a decline in one of them. Another was to buy into Porsche while betting that Volkswagen shares would fall, in a bid to profit from Porsche’s expected success.
Many short-sellers had borrowed the VW shares that Porsche is entitled to through its options contracts in order to speculate on Volkswagen stock, analysts said. But Porsche’s statement appeared to have prompted the banks that wrote the options contracts to demand those shares back, so as to have them ready for Porsche.
As of last week, roughly 12.9 percent of Volkswagen shares were lent out, according to Data Explorers, a London research firm. It was an unusually high number and the most for any member of the DAX in Germany.
With Porsche already owning so much of Volkswagen, and more shares tied up in stock funds linked to Germany’s DAX stock market index, the number of VW shares that were readily available for sale, known as the “free float,” was relatively small. That amplified the effect of the dash to buy Volkswagen shares, as demand vastly outstripped supply and drove the price higher when speculators betting against VW sought to cover their losses by buying.
“There is no other explanation than Porsche’s counterparties are lending out the shares,” said Arndt Ellinghorst, head of European automotive research at Credit Suisse in London. “That means heavy losses for funds who shorted them.”
Shares in Morgan Stanley, Goldman Sachs and Société Générale of France all tumbled on Tuesday on concern the banks might be caught on the wrong side of trades involving Volkswagen. Morgan Stanley said it had no exposure to the automaker.
It is not the first time Volkswagen shares have fallen prey to speculative gyrations. It lost a quarter of its value on Oct. 20 as short-selling seemed to gain traction amid a sense that Volkswagen would lose value if Porsche could steer decisions at the larger company to its advantage.
In a broader sense, the losses that Porsche has inflicted on short-sellers are collateral damage inflicted during its campaign to bring Volkswagen firmly under its thumb.
Although the two companies are linked by one powerful individual, Ferdinand Piëch, who heads Volkswagen’s board and also sits on Porsche’s, VW employees and their union have fought against a full takeover by Porsche, largely through their alliance with Lower Saxony, whose “golden share” lets it block major decisions about Volkswagen.
But the European Union is closing in on a ruling — the second since Porsche bought into Volkswagen — that would force Germany to alter the law underpinning the state’s share. That has created an opening for Porsche, which is based in Stuttgart, to assert control.
(=> nytimes.com)
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